Show economic rent and transfer earnings on a labour market diagram and say how elasticity changes them
6 min
4 questions
Key terms
Economic rent
Economic rent is the part of a worker's earnings above the least they would accept to stay in their current job.
Transfer earnings
Transfer earnings are the least a worker would accept to stay in their current job rather than move to their next best alternative.
A rise in demand for labour
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BeforeAt wage W1, L1 workers are employed. Area T1, under the supply curve S, is transfer earnings; area R1, above S and below W1, is economic rent.
Demand for labour shifts right, the wage rises from W1 to W2, employment rises from L1 to L2, and economic rent grows.
The supply of labour curve is an upward sloping function of the wage rate. Each point on it is the least one more worker would accept to take the job, so the area under it up to L1 is transfer earnings.
Everyone is paid W1, so each worker gets the gap between W1 and the supply curve on top of their transfer earnings. That area, above the supply curve and below the wage, is economic rent, the labour market's version of producer surplus.
When demand rises to D1, the workers already employed would have stayed at W1, so all of the rise to W2 is economic rent for them. Each new worker up to L2 is paid W2, part of it transfer earnings and part economic rent.