The pros and cons of sick pay schemes: Contagious presenteeism and noncontagious absenteeism behaviour

Stefan Pichler, Nicolas Robert Ziebarth

In the past decade, dozens of US cities and seven US states have mandated employers to offer paid sick leave. This column investigates the relationship between sick pay and influenza-like illness rates. The results suggest that the mandates reduced the spread of infectious diseases, while having no significant effect on employment or wages.

In 1883, Germany under Chancellor Otto von Bismarck became the first country in the world to pass a law on sick pay. The Statutory Health Insurance Bill created the first social health insurance system. More than 130 years have passed, but many countries still do not provide universal sick pay for their workers.

Among industrialised countries, however, only Canada, Japan, and the US do not provide universal access to paid sick leave (Heymann et al. 2009). For example, in 2011, only 65% of all workers had access to paid sick leave in the US. Low-income, part-time, and service sector workers had coverage rates of less than 20% (Susser and Ziebarth 2016).

San Francisco was the first city in the US to introduce mandated sick pay, in 2007. Since then, dozens more cities have done the same and there is currently a further wave of proposed sick pay legislation in other cities and states.

It is unclear, however, how workers react to these laws. Opponents of mandated sick pay argue that this social insurance benefit encourages shirking. For example, back pain is one of the most common reasons for workers in Germany calling in sick. Workers can call in sick quite easily in Germany, and employees took on average 10.8 sick days in 2016 (Statistisches Bundesamt 2018). A doctor’s note is required only if the illness lasts three or more days. Moreover, the doctor determines how long an employee will remain on sick leave, during which time the employee continues to receive 100% of her wage (for up to six weeks per sickness episode).

By contrast, the US mandates are much less generous. Workers typically earn one hour of sick pay for every 30-40 hours worked. A recent study by the Bureau of Labor Statistics (BLS) found that this leads to 7-8 days of sick pay per year, on average (BLS 2016). Because this sick pay credit is individualised, and unused days roll over to the next year, one would expect shirking behaviour to play a small role in the decision of employees to take sick leave.

On the other hand, sick pay mandates may have advantages. They reduce inequality between sociodemographic groups. They reduce the burden on parents who can typically take a sick day for a sick child.

Sick workers are also less productive, and working while sick increases the time an employee takes to recover. People who work while sick risk infecting co-workers and customers with infectious diseases such as the common cold or flu, and so we can hypothesise that sick pay coverage reduces the negative externalities resulting from these infections.

In our recent work (Pichler and Ziebarth 2017), we show how the introduction of mandated sick pay in the US, as well as changes in sick pay generosity in Germany, have affected the spread of diseases. We develop a model that allows us to quantify the negative externalities from contagious presenteeism and infections. This represents the first attempt to define contagious presenteeism as a negative externality of a suboptimal provision of sick pay, and then to empirically identify it.

Effects of the introduction of mandated sick pay in the US

We first employ data from Google Flu, which uses the search intensity of flu-related keywords in different metropolitan areas to develop a predictor for influenza-like illness (ILI) rates. We show that the Google Flu rates are indeed strongly correlated with actual ILI rates, as published by the Center for Disease Control. Next, we use this to show that ILI rates decreased in cities and states that mandated sick pay, by about 5%.

Figure 1 illustrates the effect of sick pay mandates on ILI rates. The black vertical line represents the introduction of the sick pay mandate. In the two years before the introduction, the ILI rate in cities that mandated sick pay (the treatment group) was comparable to the ILI rate in cities that did not mandate sick pay (the control group). After the introduction of the sick pay mandate, the ILI rate decreased substantially in the treatment group relative to the control group. The large variations seen in Figure 1 were due to seasonal flu waves. IF there was no flu wave, the law obviously would make little difference. During a flu wave, however, sick pay mandates reduced the flu rate by up to 40%.

Figure 1 Effects of sick pay in the US on weekly flu rates

Source: Pichler and Ziebarth (2017).

In order to understand the underlying mechanism, and to collect evidence that the reduction in ILI rates was in fact a result of sick leave, we run similar placebo analyses using Google search terms such as 'back pain', 'flu vaccination' and 'gun control'. We do not find a significant relationship between these keywords and sick pay.

Effects of changes in mandated sick pay generosity in Germany

In 1996, Germany enacted a bill that reduced sick pay. To reduce suspected shirking, the minimum federal replacement rate was cut from 100% to 80% of the wage. This measure reduced sickness absence (Ziebarth and Karlsson 2010). We are able to show that this reduction does not show the full picture.

On one hand, the law was successful in reducing shirking. In particular, sickness absence due to back pain decreased by almost 30%. But the reduction in sick pay also led to an increase in contagious presenteeism, as more sick workers with contagious diseases went to work. We find a zero total effect on sick leave due to contagious diseases, as the increase in sick leave due to new infections offset the decrease due to lower sick pay.

Overall, our work shows that sick pay can be an effective instrument to reduce infections, especially during flu waves. From an economic point of view, sick pay reduces negative externalities. When policymakers introduce such laws, however, they should ensure that policies also minimise incentives for shirking behaviour.

Effects of mandated sick pay on employment and wages

We can also ask whether these mandates are necessary, or whether firms would find optimal free-market solutions without being compelled to do it by a government. If a mandate lowers infection rates at the workplace it would certainly reduce costs and, as diseases also spread to third parties, one could argue that mandates protect people outside the workplace as well.

On the other hand, mandating sick pay may increase labour costs and reduce employment. The main objections voiced by opponents are negative employment and wage effects. In a related paper, we also use BLS data to evaluate the potential wage and employment effects of US sick pay mandates (Pichler and Ziebarth 2018). Our findings show that the sick pay mandates in the US have note reduced employment or wages significantly.

It seems that sick pay mandates have improved population health by reducing infections and negative externalities. They have also improved the quality of jobs and made it easier for low-income families to balance work and family life. And there does not seem to be much evidence for substantial employment losses or wage reductions.

References

Bureau of Labor Statistics (2016), "Employee Benefits Survey: Paid sick leave: Number of annual days by service requirement".

Heymann, J, H J Rho, J Schmitt, and A Earle (2010), "Ensuring a Healthy and Productive Workforce: Comparing the Generosity of Paid Sick Day and Sick Leave Policies in 22 Countries", International Journal of Health Services 40(1): 1-22.

Pichler, S and N R Ziebarth (2017), "The pros and cons of sick pay schemes: Testing for contagious presenteeism and noncontagious absenteeism behavior", Journal of Public Economics 156: 14-33.

Pichler, S and N R Ziebarth (2018), "Labor Market Effects of US Sick Pay Mandates", IZA Discussion Paper 9867.

Statistisches Bundesamt (2018), "Staff on sick leave".

Susser, P and N R Ziebarth (2016), "Profiling the us sick leave landscape: Presenteeim among females", Health Services Research 51(6): 2305-2317.

Ziebarth, N R and M Karlsson (2010), "A natural experiment on sick pay cuts, sickness absence, and labor costs", Journal of Public Economics 94(11–12): 1108-1122.