Mandatory Sick Pay Provision: A Labor Market Experiment

Date Added: Mar 2010
Format: PDF

Sick-pay is a common provision in labor contracts. It insures workers against a sudden loss of income due to unexpected absences and helps them smooth consumption. Therefore, many governments find sick-pay socially desirable and choose to mandate its provision. But sick-pay is not without its problems. Not only it suffers from moral hazard but more importantly it is subject to a potentially serious adverse selection problem (higher sick-pay attracts sicker workers). In this paper the authors report results of an experiment which inquires to the extent and the severity of the adverse selection when sick-pay is voluntary versus when it is mandatory.