A kink that makes you sick: The effect of sick pay on absence

Abstract

SummaryWe exploit a regression kink design to estimate the elasticity of the duration of sickness absence with respect to replacement rate. Elasticity is a central parameter in defining the optimal social insurance scheme compensating for lost earnings due to sickness. We use comprehensive administrative data and a kink in the policy rule near the median earnings. We find a statistically significant estimate of the elasticity of the order of one. | INTRODUCTIONAbsenteeism leads to sizeable losses of working time worldwide. In some OECD countries, nearly 10% of annual working days are lost because of sickness absence (DICE Database, 2017; see Treble & Barmby, 2011). The costs of absenteeism are considerable for individuals themselves, employers, co-workers, and health and benefit systems. A sickness insurance system is designed to protect individuals from earnings losses. Among cash benefits, sickness insurance is one of the most important social protection schemes in Europe (Eurostat, 2017). The key policy parameter of the system is the replacement rate, that is, the ratio of sickness insurance benefits to past earnings.We examine the effect of the replacement rate of the Finnish sickness insurance on the duration of sickness absence. We find a substantial and robust behavioral response in a universal insurance scheme. The statistically significant point estimate of the elasticity of the duration of sickness absence with respect to the replacement rate is centered around one. Elasticity refers to the intensive margin, that is, the incentive effect conditional on being sick. The point estimate is lower when we exclude long spells.The elasticity of the duration of sickness absence is a vital parameter of an optimal sickness insurance system, because the replacement rate affects workers' financial incentives to be absent from work through a moral hazard or hidden action effect. In the absence of externalities, an optimal social insurance system balances the marginal costs of more generous payments to the sick, with the welfare gain resulting from the consumption smoothing that the benefits allow, captured in the Baily-Chetty formula (Baily, 1978;Chetty, 2006;Pichler & Ziebarth, 2017).We use a regression kink design (RKD; see Section 3) to identify the causal effect of the replacement rate. The method is similar to regression discontinuity design, where one exploits level jumps in policy rules, but in the RKD the slope of the policy rule changes and we analyze whether the slope of the behavioral response changes as well. Unlike in most other countries (Frick & Malo, 2008, pp. 510-511), the compensation of sickness insurance in Finland is not a fixed fraction of past earnings. Instead, the policy rule follows a piecewise linear scheme with a replacement rate that decreases with earnings. The institutional setting allows us to use RKD, in which the identification of the effect is based on a predetermined, nonlinear benefit function (Card, Lee, Pei, & Weber, 2012;Nielsen, Sørensen, & Taber, 2010). ---------------------...

The Role of Employer-provided Sick Pay in Britain and Norway

“…First, we establish the role played by the public sick pay compensation regime by comparing sickness absence in Britain and Norway, identifying effects using distinctive features in the Norwegian "kink" in compensation that occurs at a point in the earnings distribution. In this sense, our focus is similar to Böckerman et al (2018) who identify a strong behavioural absence response from a kink in the Finnish sick pay legislation, implying an elasticity of the duration of sickness absence with respect to the replacement rate in the order of 1.4. 4 However, we do not pursue a regression kink design, but compare the difference this kink makes in Norway to a scenario -Britain -where no such kink exists, using micro workplace data that also net out heterogeneity across workplaces.…”

“…5 For pay above this threshold, only 6G is paid in public sick pay. As such the Norwegian sick pay legislation is comparable to the Finnish system: both are kinked (the Finns have more than one kink) (Böckerman et al, 2018). Figure 1 highlights the difference between British and Norwegian public sick pay.…”

Sick Pay Insurance and Sickness Absence: Some European Cross‐country Observations and a Review of Previous Research

“…Bockerman et al . () report an estimate of around 1 for Finland, that is a 1% increase in the benefit will make the length of the sickness spells increase by 1%.…”

The effectiveness of medical and vocational interventions for reducing sick leave of self‐employed workers

“…Over the past decades, many studies have provided (or reviewed) evidence for the presence of moral hazard in public sickness insurance systems (Fevang, Markussen & Røed, ; Kreider, Manski, Moeller & Pepper, ; Pichler, ; Peter, Soika & Steinorth, ; Puig‐Junoy, García‐Gómez & Casado‐Marín, ). For example, Barmby, Orme, and Treble (); Henrekson and Persson (); Johansson and Palme (); Ziebarth and Karlsson (); Markussen, Røed, Røgeberg, and Gaure (); Ziebarth (); Böckerman, Kanninen, and Suoniemi (); De Paola, Scoppa, and Pupo (); Ziebarth and Karlsson (); and Pichler and Ziebarth () indicate that more generous sick leave benefits increase the incidence and/or the duration of sickness absenteeism. In addition, some studies have investigated the effectiveness of medical practitioners in reducing this sick leave.…”