Economic rent and transfer earnings

Economic rent and transfer earnings

The wage received by a worker can be broken down into two components.

Transfer earnings

Transfer earnings are the reward necessary in order to keep owners of factors of production supplying their resource. In terms of labour, transfer earnings are the minimum reward necessary to prevent a worker from transferring to their next best source of employment. In other words, transfer earnings are those which just covering opportunity cost.

Economic rent

Economic rent is the reward to labour which exceeds opportunity cost and transfer earnings. For example, if a doctor would leave the profession if her wage fell below £80,000 a year, and she currently earn £120,000, transfers earnings are £80,000 and economic rent is £40,000. For most workers wages are composed of both elements. This can be shown graphically.

The ratio of transfer earnings to economic rent will vary, and depends largely on the elasticity of supply of labour – the more inelastic the supply of labour the greater the share of economic rent.

Go to wage differentials