Seniority Rent

Economist has an article describing how the employee productivity declines with age. Yet the pay structure is designed to take it into account. Hence we have a situation where even though the employee productivity is declining, his wages keeps on increasing.

The only way this model is sustainable is by:
workers may be paid less than their productivity during the early part of their tenure in exchange for (the implicit promise of) being paid more than their productivity during the later periods of their tenure with the firm. This implies the creation of “seniority rents.”

I agree that the points raised seem valid, but then I have problem digesting it.
1. I agree that the capacity to do manual labor declines with age. But then a regular job involves a lot more than just lifting weights and doing manual labor.
In a knowledge society, the employers benefit from their senior employees experience and advise. History repeats itself, and during the course of their long career, have worked in different jobs, experienced unique situations and hence are in better position to help their peers face not only the threats of today, but also challenges for the future. Something which is hard to capture in an individual’s statistics.

2. The bonus/commissions and other productivity linked benefits often constitutes a significant portion of the employee compensation. This variable pay allows the employers to eliminate the Seniority Rent (if any) so that everybody gets a fair price.

3. Hiring and training a new employee is expensive (typically the costs are in the tune of 6 months compensation). Men in their twenties might have higher productivity, but they also switch jobs more often than somebody in his 50ies. Hence justifying the higher wages for senior workforce.

4. The era of lifetime employment is over. Most employees switch jobs every 5-10 years. And each time they switch jobs, their pay packages are fully renegotiated. The new employer pays in accordance to the skills, experience and the capabilities of the new hire. Hence it is not unheard of desperate employees’ new pay package being lower than their last one. Hence the very notion of seniority rent is invalid.

3 replies on “Seniority Rent”

Ankur, it is very important to retain senior employees because over the years they build a relationship with the clients. If seniors leave they might end up taking a chunk of client base with them. However after a certain age switching jobs becomes difficult because the number of vacancies are less at senior levels .

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