Dundee Discussion Papers in Economics 143: Theoretical approaches to managing sickness absenteeism

The cost of absenteeism in the UK has been estimated to be £12 billion per annum. If productivity is some function of the health state of the worker firms may prefer some sickness absence to universal attendance. However, when the health state of the worker cannot be verified the firm must structure its employment contract in order to align the workers’ incentives with its own. The nature of the optimal contract under these circumstances has recently been analysed by Chatterji & Tilley (2002) and Skåtun (2003) who generate rather different theoretical results and empirical implications. In this paper we synthesise these two approaches and reconcile their results.