Sick pay reforms and health status in a unionised labour market

Publication Date01 May 2017
AuthorLaszlo Goerke
Laszlo Goerke*
We theoretically analyse the effects of sick pay and employees’ health on collec-
tive bargaining, assuming that individuals determine absence optimally. If sick
pay is set by the government and not paid for by firms, it induces the trade union
to lower wages. This mitigates the positive impact on absence. Moreover, a
union may oppose higher sick pay if it reduces labour supply sufficiently. Better
employee health tends to foster wage demands. If the union determines both
wages and sick pay, we identify situations in which it will substitute wages for
sick pay because adverse absence effects can be mitigated.
Individuals who are absent from work for illness-related reasons are entitled to
continued wage payments or other types of income replacements in many coun-
tries. The amount of sick pay and the regulations concerning its receipt are often
determined by the government and, hence, widely applicable. Similarly, alter-
ations in the quality of health services and of medical treatments, modifications
in the availability of medicines, in imbursement rules for medication costs and
also advances in medical technology are likely to concern a substantial fraction
of an economy’s population. This will particularly be the true if insurance is
mandatory or if health expenditure is predominantly publicly funded.
fore, policy-induced changes in the determinants of absenteeism such as in sick
pay or the health status of employees often affect large parts of an economy
and its labour market. Knowledge of the resulting consequences is particularly
*IAAEU-Trier University
The first requirement mandatory insurance is fulfilled, for example, in most countries
belonging to the European Union (MISSOC 2015). The second condition public funding
is satisfied in many if not most member states of the OECD and the European Union, where
the public share of total expenditure on health averages almost 75% (OECD 2012, p. 129,
OECD 2013, p. 165).
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12123, Vol. 64, No. 2, May 2017
©2016 Scottish Economic Society.
important for labour markets which are not fully competitive. This is the case
because trade unions and firms or employer associations generally determine
wages and working conditions in many countries. In the European Union, for
example, collective bargaining coverage averages almost 70% and reaches or
exceeds 90% in about a quarter of its member states (European Commission
2015, p. 29).
Consequently, in this study we analyse the labour market repercussions of
changes in the determinants of absence, assuming a unionised workforce. We
focus on sick pay and the quality of medical treatments. First, we investigate
a setting in which the trade union can directly influence wages, while sick pay
is exogenous. We show that wages will fall with sick pay if the direct labour
demand effects of an increase in sick pay are small. Higher sick pay will, for
example, leave labour demand unaffected if it is not paid by firms but by
social insurance funds or publicly funded institutions. In such a case, the
union’s preferred wage is affected via the impact of sick pay on the utility of
employed members. Higher sick pay makes them better off. Therefore,
increasing employment becomes more attractive for the trade union. Such a
rise in employment necessitates lower wages demands. If wages fall and the
direct labour demand consequences of higher sick pay are either absent or rel-
atively moderate, an increase in sick pay may thus raise employment. Alterna-
tively, it can be assumed that sick pay results from continued wage payments
in case of absence. Accordingly, firms are likely to bear its entire costs. This
implies that employment declines at a given wage with a higher level of sick
pay. Hence, the trade union’s incentives to lower wages are enhanced further.
However, the wage reduction may not fully balance the increase in labour
costs via sick pay. In such an alternative institutional set-up, employment may
decline with sick pay. In consequence, the labour market effects of sick pay
crucially depend on whether the income of employees during illness-related
absence periods results from continued wage payments or transfers, for exam-
ple, by the employee’s health insurance. In the former case, labour cost and,
hence, direct labour demand effects are more pronounced than if a public
institution covers the costs. Moreover, if the trade union lowers wages in
response to an increase in sick pay, this reinforces the direct impact of sick
pay on absence behaviour. This will be the case because the loss of income
becomes smaller when the reward for going to work is reduced.
In addition to the effects of sick pay, we analyse the implications of
advances in medical technology. Such improvements can make higher wages
more attractive because better treatments lower unavoidable absence periods
which, in turn, raises labour demand. In consequence, incentives for the trade
union to increase wages are enhanced. While lower absence rates tend to raise
employment, higher wages have the opposite impact. Accordingly, the
employment consequences of advances in medical technologies are basically
Second, we consider a set-up in which there is a basic level of sick pay. This
can be supplemented by additional payments which the trade union negotiates
with the firm, in addition to wages. In such a setting, the trade union will not
Scottish Journal of Political Economy
©2016 Scottish Economic Society

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