Problems with seniority based pay and possible solutions

Seniority based pay is a wage scheme where the wage of a worker is increasing over time. This wage scheme can bring many advantages for both the worker and the firm, but it may also create some problems. In this paper, I will elaborate on three main problems. The first problem is a screening problem, where the firm does not know true ability of the worker and therefore has the chance to hire a low ability worker or to dismiss a high ability worker. The second problem is a moral hazard problem: the worker does not want to exert effort. The last problem is the problem that will arise if the firm finds it more beneficial ex post to invest in technology, which makes the worker reluctant for the firm. I will explain the problems using principal-agent models and will provide possible solutions to these problems.