Firm insurance and sickness absence of employees

Purpose - In Denmark and several other European countries, firms are obliged to cover the first two weeks of sickness. The insurance scheme is provided by government authority and is designed to help small firms with the financial burden related to sickness absence of their workers. The purpose of this paper is to investigate the effect of firms’ participation in an insurance scheme on the long-term sickness absence of their employees, using administrative records. Design/methodology/approach - To identify potential moral hazard, the authors use IV approach created by the eligibility threshold, in order to identify the true causal effect of sickness insurance on sickness absence of workers. The authors use the eligibility criterion as an instrument for the participation in the insurance scheme. The authors confirm the presence of moral hazard in insured firms. Findings - The authors show that sickness absence in insured firms is much more prevalent than in uninsured firms. Sickness spells in insured firms are shorter and the conditional probability to return back to work from sickness is much higher in insured firms. Practical implications - These results suggest that employees in insured firms are less monitored during the first two weeks and that their sickness is less serious. The authors demonstrate in the paper that the minimum cost of the present insurance scheme is similar to about 1,100 man-years. On top of that comes a substantial cost to more short time sickness. Originality/value - The authors provide additional evidence on this topic using precise administrative spell data combined with socio-economic data. Compared to previous literature, the authors include duration analysis and identify the presence of moral hazard using a Cox proportional hazard model.