Tenure, Wage Profiles and Monitoring

Efficiency wage theory predicts that firms can induce worker effort by the carrot of high wages and/or the stick of monitoring worker performance. Another option available to firms is to tilt the remuneration package over time such that the lure of high future earnings acts as a deterrent to current shirking. On the assumption that firms strive for the optimal trade-off between these various instruments, we develop a two-period model of efficiency wages in which increased monitoring attenuates the gradient of the wage-tenure profile. Our empirical analysis, using two cross sections of matched employer-employee British data, provides robust support for this prediction.