Is seniority-based pay used as a motivational device? Evidence from plant-level data

In this chapter we use data from industrial plants to find out whether seniority-based pay is used as a motivational device for production workers. Alternatively, seniority-based pay could simply be a wage-setting rule independent of incentives. Unlike previous papers, we use a direct measure of seniority-based pay as well as measures of monitoring devices and explicit incentives. We find that those firms that base their wages partly on seniority are less likely to offer explicit incentives. They are also less likely to invest in monitoring devices. We also discover that these companies are more likely to engage in other human resource management policies, which result in long employment relationships. Overall these results suggest that seniority-based pay is indeed used as a motivational device.