Modern economists make use of the concept of transfer earnings in order to explain the remuneration of the factors of production.
Take the case of a worker. Suppose in his present occupation he is earning Rs. 600.
In this case, he has to give up that occupation, suppose the next best alternative employment fetches him Rs. 500. This is his transfer earnings, i.e., what he will get on transfer to the next best alternative employment.
This means that in the present employment, he must at least get Rs. 500 (his transfer earnings), otherwise he will give it up and move to his next best alternative employment where he can earn Rs. 500. In other words, the transfer earning is the minimum price which must be paid to a factor of production to induce it to stay in the industry or which is necessary to retain it there. If this price-is not forthcoming, the factor unit will transfer itself to its next best alternative use.
In Benham’s words, “The amount of money which any particular unit could earn in its best paid alternative use is sometimes called its transfer earnings.” To quote Mrs. Robinson, “The price which is necessary to retain a given unit of a factor in a certain industry may be called its transfer earnings or transfer price, since a reduction of the payment made for it below this price would cause it to be transferred elsewhere; and any particular unit of a factor may be said to be at the margin of transference, or to be a marginal unit, if the earnings, which it receives in the industry, where it is employed, are only just sufficient to prevent it from transferring itself to some other use.”
Take the case of land. Suppose a land used for the cultivation of cotton earns a little more than when it is used for the growing of sugarcane. If the profit in cotton cultivation falls a little or that in cane cultivation rises a little, the cotton land will be converted into cane land. Thus, fluctuations in prices of different crops may make the cultivation of one crop more profitable than that of another.
There will, then, be a tendency for the land to be transferred from one use to another in search for higher earnings. If an agent is earning more than what it would earn when transferred to the best-paid alternative, the surplus is rent.
The importance of the concept of transfer earnings lies in this that:
(a) It helps in the determination of the value of a factor of production.
(b) The supply of factor unit for a particular use depends on its transfer earnings. If it is not paid, its supply will not be forthcoming.
(c) According to the modern theory of rent, economic rent, depends on the transfer earnings of a piece of land.