Mandatory Sick Pay Provision: A Labor Market Experiment

Sick-pay is a common provision in labor contracts. It insures workersagainst a sudden loss of income due to unexpected absences andhelps them smooth consumption. Therefore, many governments findsick-pay socially desirable and choose to mandate its provision. Butsick-pay is not without its problems. Not only it suffers from moral hazardbut more importantly it is subject to a potentially serious adverseselection problem (higher sick-pay attracts sicker workers). In this paperwe report results of an experiment which inquires to the extendand the severity of the adverse selection when sick-pay is voluntary versuswhen it is mandatory. Theoretically, mandating sick-pay may beeffective in diminishing adverse selection. However, our data provideclean evidence that counteracting effects are more salient. Mandatorysick pay exacerbates moral hazard problems by changing fairness perceptionsand, as a consequence, increases sick pay provision far abovethe mandatory levels.[...]