Ok so here is the situation. You own a small business. The business is not doing that well, so you need to lay some people off. You cut a few people. You need to cut one more person. There are two people that you are debating between. The first guy has decent skills, but has been with the company since for years (Seniority). The second guy has a lot more skill than the first guy, but has only been with the company for a month (Skill). Who do you keep?

In business you'd have to be cold hearted once in awhile. Before I choose between the two, I'll make sure to compare their performances as well and not just their skills or seniority. If the senior ones performs better than the skilled ones (finishing more jobs within a day effectively) then I'll keep him. But if the skilled ones performs his job better, than I'll keep him instead even though the other one has been my employee for years. Some people might be skilled but aren't as devoted to their jobs compared to some less skilled people. Devoted people are the best to have, with a mixture of enough skills to perform well. There's no need for "too skilled people but no devotion".

Seniority wins for me. If somebody is loyal enough to stick with you for years you (the company) should be loyal enough to stick with them through good and bad times. That's what is wrong with alot of places, no loyalty, they just want to make a buck.

Tornadocam is right on this one.  One month is way to quick to tell what kind of employee you are dealing with.  If you have kept the guy with seniority around and are doing your own job right then you have a dedicated and capable employee that you know you can trust, so I'd keep him and tell the newb sorry your good and everything but I cannot afford to pay you right now.

When people are in a job for a long time, they start feeling like they are owed something or there is a sense of entitlement simply because they've been there.

I'm a fan, especially in competitive business trying to survive, in "What have you done lately?"  There's someone who's motivated, wants to make a name for themselves and is ready to work hard and bang out hours?  It's a win-win situation.  The guy who has been around may have lost it.  Too bad.  He's gone.  Keep producing and keep working.  It's that way in sports, why not in business?

Business is at-will employment and workers don't owe companies anything as long as they hustle.  The business doesn't owe workers anything except for agreed upon arrangements like 401(k)s or 403(b)s or accounts like that.

If I have to cut someone, it's the guy who doesn't produce.  The new kid may move on in six months or a year but he will have helped me out and I would have been constantly shopping for new talent anyway.

Unfortunately, in my job, seniority is used to determine many things such as transfers, vacations, preferred shifts, etc.
Most of the senior guys that have been on for many years are terrible workers that refuse to change from the old ways of doing things simply because that's the way they have always done something.