Transfer Earnings

When you apply for a job there is a minimum amount that you would be willing to work for. This amount is equal to the value of the next best alternative job.

For example if Joe Bloggs is offered a salary of £20,000 as a plumber, where as working in Tesco he could earn £14,000, then his transfer earnings would be £14,000. If he was offered less than £14k as a plumber, then he would leave the market and work at Tesco.

This outcome is based on the assumption that money is the only reward to work.

Other rewards to work could include:

Holidays / Leisure time

Company assets e.g. Company car

Insurance

Economic Rent

In the earlier example Joe Bloggs would receive an economic rent of £6,000




Any point on the supply curve represents the minimum wage required to keep the corresponding number of workers in the market.

Where as the wage level is determined by the interaction of demand for labour (MRP) and supply of labour, the level of earnings required to keep employees in their current job depends on the elasticity of supply of labour.

Application of Theory

Perfectly Inelastic Supply

Where supply is perfectly inelastic (or highly inelastic e.g. footballers, priests) the transfer earnings are very low. This means that the employees would do the job for no wage.

Perfectly elastic Supply

Where supply of labour is perfectly elastic (as in a perfectly competitive labour market), given the infinite number of potential employees and perfect mobility of labour all earning are transfer earnings.

Each employee is paid the lowerst wage to keep them in their current employment.Therefore a firm in that market cannot pay anoy lower wages without losing all their employees.