The annual cost of absenteeism from the workplace in the UK has been estimated to be over 1% of GDP. The traditional approach to a discussion of absence has been for the firm to passively accept both wages and sick pay and allow workers to choose their absence behaviour. Most empirical research has been based on this approach. However, if absence is costly why should firms pay extra-statutory sick pay? One reason may be the phenomena of presenteeism (ill workers attending work). This may adversely affect productivity. This paper shows that allowing for presenteeism has important implications for both the design of optimal wage-sick pay contracts and for the interpretation of empirical studies. Specifically, we show that firms will offer a level of sick pay greater than the statutory minimum.
- Sick pay