Long-term absenteeism and moral hazard - Evidence from a natural experiment

Abstract

This paper shows that long-term sick employees are unlikely to be very responsive to moderate monetary labor supply incentives. The paper, theoretically and empirically, evaluates the labor supply effects of cuts in statutory sick pay levels on long-term absenteeism in Germany. Cutting sick pay did not significantly reduce the average incidence and duration of sick leave periods longer than six weeks. A simple theoretical model confirms the empirical findings under the assumption that the long-term sick are seriously sick. Thus, moral hazard seems to be less of an issue in the upper tail of the sickness spell distribution. However, the results show heterogeneity in the effects and significant duration decreases for certain subsamples.