How does Rent Element Appear in the Earnings of all Inputs?

This article will guide you about how rent element appears in the earnings of all inputs.

Labour:

As rent element in land arises due to the inelasticity in the supply of land, so does labour—it may thus earn rental income. A labour enjoys rent when actual earnings exceed opportunity cost or minimum supply price or transfer earnings.

Let us assume that the transfer earning of a labour per month is Rs. 1,000. This is the price that must be paid to retain the service of this labour.

If it is not paid, he will move to the next best available employment. If the actual earning of this worker becomes Rs. 1,100 then he will enjoy an economic rent of Rs. 100. Thus, economic rent is the difference between actual earnings and transfer earnings. Earnings above the opportunity cost are economic rent.

Further, let us assume that the opportunity cost of a labour is zero. This means that this labour is willing to work even if no payment is made. Apparently, this seems to be an unrealistic proposition. But, in reality, such a situation can be conceivable at a particular point of time.

Sometimes, a worker—in order to accumulate experience or to receive some sort of practical training for conducting his service in a near future date— may be willing to work at a zero price. But if he is paid something for the job rendered, his entire earnings then become rent.

Again, in the earnings of the talented, say, football player like Maradona, a film-star like Amitabah Bachchan, etc., one finds huge rental income. These people are very much in short supply in relation to demand. Because of the specific quality possessed by these individuals they receive huge payments in excess of what is needed to keep them from transferring to other occupations.

This kind of rental income is thus attributed to ability of labour called ‘rent of ability’. The economics of superstars then has the ‘superstar effect’— a phenomenon where people with small differences in ability or productivity earn more than the average persons endowed with average quality.

Capital:

There is a rent element in interest income also. Suppose, an individual expects at least 15 p.c. p.a. interest income from an investment project. Let it be the minimum supply price. Now, if that project yields a rate of interest of 17 p.c. p.a., then an interest income of 2 p.c. is nothing but a rental income.

This is also true for a machine or any capital goods which enjoys surplus over and above the opportunity cost.

Entrepreneur:

Like land, labour and capital, the supply of entrepreneur is more or less inelastic. In fact, profit is the rent of ability. Not all organizers are equally efficient. Efficient ones earn more than the normal profit of a less efficient organizer.

Inefficient organizers do not enjoy any rent— just like Ricardo’s no-rent land or marginal land. As rent arises due to the differences in the ability of an organizer, this rent may also be called ‘rent of ability’.

Thus, each and every input earns economic rent which is an excess over minimum supply price. However, one point should be added here. Land is more or less fixed—both in the short run and in the long run. But labour, capital, etc., may be inelastic or fixed in the short run and not in the long run. In the long run, all these inputs are to some extent elastic.

That is why, in the long run, rent element in incomes of other factors like labour, capital, etc., disappears or becomes less. But land rent always arises due to its high inelasticity even in the long run.

That is why Marshall had to say that – “The rent of land is the leading species of a large genus.”