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

10.6 Transfer earnings and economic rents
In Figure 10.8 the industry makes total wage payments equal to the rectangle OW0EL0. It pays L0 workers
W0 each. These payments comprise the total transfer earnings AL0E and the economic rent OAEW0•
Economic rent arises if the factor supply curve is not horizontal. With a horizontal supply curve, no worker
earns more than the going rate required to keep pianists in the industry. All earnings are transfer
earnings.
Note the distinction between the firm and the industry. Economic rent is an unnecessary payment as far
as the industry is concerned. By colluding in order to wage-discriminate, paying each worker his transfer
earnings alone, the industry could retain all its workers without paying them economic rent. But the entire
wage W0 is a transfer earning as far as a single competitive firm is concerned. If it fails to pay the going rate,
its workers will go to another firm.
In the UK football industry 3 and the US baseball industry, it is often said that high player salaries are
bankrupting the industry. But wages are high because the derived demand is high - crowds at the ground
and television rights make it profitable to supply this output - and because the supply of talented players
is scarce. The supply curve of good players is steep: even very high wages cannot increase the number of
good players by much. There is no simple link between high salaries and the ruin of the game. If supplying
the output was not profitable, the derived demand for players would be lower and their wages reduced.
Higher education pays off
Nowadays most students have to contribute
to the cost of their higher education.
What can we tell them about the financial benefits likely
to accrue in the future? The table shows the results of a
major empirical study on determinants of people's wages
by the time they are 33 years old.
The research suggests that degrees add a lot to future
earning power. This is consistent with the idea of human
capital. Human capital is the result of past investment in
order to raise future income. The cost of investing in
another year of school education or a further qualification
is the direct cost, such as tuition fees, plus the opportunity
cost of the time involved, namely delaying paid
employment. The benefit of the investment is a higher
future monetary income or a future job yielding more
job satisfaction.
The results in the table also outline another important
fact. Investing in higher education by students seems to
pay off in terms of future earnings, but the subject
studied also matters. Economics students can expect to
earn much more than history or language students.
Source: Blundell, R. et al. (2000) Returns to higher education in Britain,
Economic Journal, 110 (461): 82-99.
First degree
% extra wage in I
Britain at age 33 for
Men
+1 5
Postgraduate degree +1 5
Extra effect by subiect
Arts -1 0
Economics +1 0
Chemistry /biology -1 7
Maths/ physics +9
Picture: © ericsphotogrophy I istockphoto.com
-
--
Women
+32
+35
+5
+24
-1 1
+1 6
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-
3 Football clubs pay transfer fees to another club from whom they wish to take over a player. These transfer fees between clubs
should not be confused with the economist's concept of transfer earnings of players, the amount needed to keep them in the
industry.
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