Lesson 16: Rent and Wages

As wages are being paid for services of labor, interest is paid for the services of capital, rent is
paid for the services provided by the land or other immovable assets and profit is for the factor of
payment to entrepreneurship.

Rent

It is typically referring to the use of property for a certain amount. It is the price paid for the use of
land and other natural resources or factors of production that is in fixed supply.

Rent has been traditionally associated with land, which is a fixed factor of production.

❑ The concept of economic rent applies to economic factors, not just land.

Economic rent is a payment more than opportunity costs. According to David Ricardo, an
influential British classical economist in early 1800s, rent is a surplus of revenue over cost, which
arises due to differences in the level of usability of the land.

❑ The scarcity of land becomes the concept of rent.

What is Rent on Land?

Rent on Land

Land is one of the most common type of investments aside from owning shares, cash, and
securities. To analyze how the price for the use of land is determined, we must look at the supply
of land and its level of demand.

Since the supply of land is perfectly inelastic, the level of demand is what determines the rent on
land. Since supply of land is fixed, demand becomes the determinant of rent.

Aside from renting the land out, the owner of the land can also opt to sell the land at a higher price
to earn a profit.

How is the Demand for Land Determined?

Economic rent also relies on productivity differences. Several determinants indicate the
productiveness of the land:

a. Products grown on the land

▪ The location attribute of the land can also be considered for its demand

b. Prices of other resources which are combined with the land

▪ City areas have higher land rents than remote areas with difficult access to
transportation and communication.
Note:

A person keen on investing on land must realize that there are also risks watching out for. For
one, it takes a long time to sell such property, which means money is not easily realized.

Wages

A wage is monetary compensation paid by an employer to an employee in exchange for work

done. Payment may be calculated as a fixed amount for each task completed, or at an hourly or
daily rate, or based on an easily measured quantity of work done. Wages are part of the expenses
that are involved in running a business.

Determinants of Market Wage Rates

A basic principle of economics is the notion that the price or value of goods, services, and even
resources, such as labor, is determined by the behavior of demand and supply.

Labor Demand

The demand for labor is like the demand for a good, and thus generally follows the law of demand.

The wage, which is the price of labor, is plotted in the y-axis of the graph, and the quantity of
labor, which can be expressed by the number of employment available in the market, is plotted
in the x-axis.

Like the law of demand, when the price if labor increases, the related quantity of labor decreases,
which makes the price of labor inversely related to the quantity of labor. This means that
employers will hire more people when wages go down.

Labor Supply

It follows the principle of the law of supply, which says that if the price of labor increases, then the
supply of labor also increases, and vice versa.

As wage increases, more people will enter the labor market and compete for higher-paying jobs.
But if wages decline, there will be fewer people looking for jobs and competing for these lower
wages.

What Is Market Clearing?

When the labor demand and supply meet at a certain wage and quantity of workers, an equilibrium
is reached. This point of equilibrium is called the market clearing. It is where firms may hire an
employee at the existing wage rate and people who would like to have that wage rate would be
able to do so. However, as this is a competitive labor market, even though there is an identified
market clearing, employers and employees may leave the labor market, as firms may want to
pay lower wages or workers may wish to earn higher wages.
Equilibrium Wages

When jobs are safe and easy, we can assume that the wages they pay are average. Most People
want to have such jobs. As the job becomes more difficult and dangerous, workers naturally
require a higher wage to do such work.

Compensating Differential is the difference in wages that arise to offset the nonmonetary
characteristics of different jobs

➢ People who work in coal mines or on night shifts usually receive a compensating

differential to make up for the unpleasant nature of the job.

Equilibrium in A Competitive Labor Market

In a perfectly competitive labor market, firms and workers are free to enter and exit the market.
This makes the equilibrium allocation of workers to firms efficient. How the workers fit the firm
maximizes the total gains that workers and firms accumulate by trading with each other.

A competitive equilibrium leads to an efficient allocation of resources.

Minimum Wage

Minimum wage is the lowest allowed wage paid to workers by virtue of legislation and government
policies.

This is a form of government intervention to alleviate poverty and income inequality in terms of
rendering job services.

The effects of minimum wages may in principle differ between industries in which employers do
and do not have control over the wage rates they pay for the labor of a given skill and application

Minimum wage is set primarily to protect workers from abusive employment practices.

A decent minimum wage is a useful tool in addressing wide disparities in wage distribution.

Reference/s:

Contemporary Economic Issues Facing the Filipino Entrepreneur (by Juvelle Cudal) – scribd.com

Contemporary Economic Issues Facing the Filipino Entrepreneur – coursehero.com

Wage – wikipedia.org

Factor Payments – wikipedia.org

Prepared by Ms. Khryssia Mae Crespo