David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 10 The labour market
Transfer earnings and economic rents
The transfer earnings of
a factor in a particular use
are the minimum payments
needed to induce the input to
work in that job.
Economic rent (not to be
confused with income from
renting out property) is the
payment a factor receives in
excess of the transfer earnings
needed to induce it to supply
its services in that use.
0
A
D
Economic
rent
Transfer
earnings
Quantity of labour
DD is the industry demand curve for labour. A quantity A
of labour would work in the industry even at a zero wage.
Higher wages attract additional workers to the industry. SS
is the industry labour supply curve. If each worker was paid
only the transfer earnings required to attract them to the
industry (to keep them on their supply curve), the industry
need only pay AL0E in wages. If all workers must be paid
the highest wage rate necessary to attract the last worker
to the industry, equilibrium at E implies workers as a whole
derive economic rent OAEW0. For workers who would work
for a zero wage rate, W0 is economic rent, a pure bonus.
Figure 10.8 Transfer earnings and economic rent
In some sectors workers are paid much more, on average, than in other sectors.
For example, talented pianists or footballers generally earn high wages. 2 Why do
they get paid so much? We need to distinguish between transfer earnings and
economic rent.
We assume that all workers hired by a firm must be paid the same wage. This is not
always true. Consider football players. In the same team, some players are paid
more than others. Nevertheless, our assumption will help us in understanding the
basic difference between transfer earnings and economic rents.
In Figure 10.8 DD is the labour demand curve for concert pianists and SS the supply
of pianists to the music industry. Even at a zero wage some dedicated musicians
would be concert pianists. Higher wages attract into the industry concert pianists
who could have done other things. The supply curve slopes upwards.
D
Because all workers are paid the same wage,
equilibrium is at E, with a wage W0 and a number of
pianists L0• W0 may be a large wage. Each firm in the
music industry pays W0 because their workers are
very talented, with a high marginal product. In the
output market (concerts), firms earn a large revenue.
The derived demand curve DD for concert pianists is
very high.
The supply curve SS shows the transfer earnings that
the industry pays to attract pianists into the industry.
The first A pianists would work for nothing. A wage
W1 is needed to expand the supply of pianists to B,
and W0 must be paid to increase supply to L0• If the
industry can pay each individual pianist a different
amount, paying only the minimum required to attract
each to the industry, triangle AL0E is the total transfer
earnings paid to attract L0 pianists.
At the equilibrium E, the last pianist entering the
industry has transfer earnings W0 since E is on the
supply curve SS. This last pianist's marginal value
product is also W0, since E is on the demand curve
DD. However, when an industry has to pay all workers
the same wage, all previous workers are paid W0 even
though the labour supply curve SS implies they would
have worked for less than W0. These workers, with
transfer earnings below W0, earn economic rent, a pure
surplus arising because W0 is needed to attract the last
pianist. Rent reflects differences in pianists' supply
decisions, not their productivity as musicians.
2 According to The Guardian newspaper, in 2009 the average Premiership footballer earned £21 000 a week. A staggering
£1 092 000 a year!
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