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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.

Early models of the functional distribution of income assume constant labor productivity among all individuals. Not until human capital theory developed did scholars take into account how productivity varied across workers. According to early human capital models, this variation came about because each individual invested differently in education and training. Those acquiring greater amounts of schooling and on-the-job training earned more. However, these models neglected why one person would get training while another would not. One explanation is individual heterogeneity. Some individuals are smarter, some seek risk, some have time preferences for the future over the present, some simply are lucky by being in the right place at the right time, and some are motivated by the pay incentives of the jobs they are in. This volume contains 10 chapters, each dealing with an aspect of earnings. Of these, the first three deal directly with earnings distribution, the next four with job design and remuneration, the next two with discrimination, and the final chapter with wage rigidities in the labor market.