Association for Public Policy Analysis & Management

This paper evaluates the effects of employer sick pay mandates on sick pay coverage, utilization and labor costs in the United States. To estimate the causal effects of mandates in four states and eight cities, we use the National Compensation Survey (NCS) from 2009 to 2018, coupled with difference-in-differences (DD) and event study models. The NCS is a rich administrative dataset at the job-establishment level specifically designed to measure and track compensation and labor costs.

Our findings show that the probability to have paid sick leave increases significantly by 9 percentage points from 64 to 73 percent in the first year. It stabilizes and persists at this level for at least four more years. We also find that the increased coverage results in 1.4 hours of additional sick leave utilization in the first quarter of the year (which is winter and the flu season). Scaling this average increase in utilization by the 9 percentage points increase in coverage implies that newly covered workers have taken on average two additional sick days between January and March. Consequently, sick leave costs for businesses have increased by these additional sick days. On average, however, spread out over all businesses, the increase in sick leave costs only amounts to 2.4 cents per hour worked (or about 27 cents per hour worked for marginal firms). With respect to crowding-out, we do not find that these costs were offset by reductions in non-mandated leave benefits such as paid vacation days.

Finally, we apply and extend the standard Baily-Chetty framework of optimal social insurance benefits to the case of optimal sick leave benefits. The social planner considers the marginally higher consumption utility of workers when sick pay is raised and weighs these marginal benefits against the firm costs of providing more generous sick pay. Even in the absence of a social planner, however, a profit maximizing firm will provide some level of sick pay as, otherwise, sick workers will come to work but not be profitable as work productivity depends on sickness. Sick pay incentivizes sick workers to call in sick and receive sick pay instead of the full salary. However, because firms solely maximize profits, the level of sick pay that they provide voluntarily will be lower than the welfare maximizing level, which also considers worker utility. We find for a wide range of plausible values that sick pay mandates have improved overall welfare.