Macroeconomic and Welfare Effects of Sick Leave Benefits in South Korea: A General Equilibrium Analysis with Alternative Financing Mechanisms

Using a calibrated OLG-DSGE model, we evaluate mandatory sick leave benefits in South Korea under three financing mechanisms: two income-based mechanisms—National Health Insurance premiums and employer payroll taxes—and a lump-sum tax. We find a sharp equity-efficiency trade-off. The income-based mechanisms generate large welfare gains for ill workers and positive average welfare effects for the overall stationary population but depress output and labor supply. Conversely, lump-sum financing minimizes macroeconomic distortions but is regressive, yielding a net welfare loss for the stationary population. From an ex-ante newborn perspective, however, lump-sum taxation becomes welfare-maximizing.