Seniority

This paper studies the optimal wage structure of a firm with imperfect monitoring of worker effort. We find that when firms can commit to (implicit) long-term contracts, imperfect monitoring leads to optimal wage profiles that reflect worker seniority. We provide a precise measure of seniority as a ratio of co-state variables and illustrate how this measure of seniority evolves over the worker’s tenure with the firm and how it affects wages, effort, and separation rates. We also show how earnings loss from unemployment reflects seniority and how optimal monitoring intensity, amenities and on-the-job training evolve with seniority.