Abstract:
Illness significantly reduces worker productivity, yet how employers respond to the
possibility of illness and its effects on work performance is not well understood. The 2003
American Productivity Audit pegged the cost to employers of lost productive time due to
illness at 225.8 billion US dollars/year. More importantly, 71% of that loss was explained by
reduced performance while at work. Studies of worker illness have been up to this point
empirical, focused primarily on characteristics which co-vary with worker illness and
absenteeism. This paper seeks to understand how employers mitigate the impact of illness on
profits through a microeconomic model, elucidating how employers influence workers
through salary-based incentives to mitigate its associated costs, providing firms and policy
makers with a comprehensive theoretical method for formulating optimal sick pay policies.
