The impact of firms' expectations & adjustments on the productivity cost of illness

Abstract

Sickness-related absenteeism hinders firms' productivity and reduces output, an effect referred to as indirect cost (IC) and often included when assessing the burden of an illness or cost-effectiveness of a treatment. The companies may, however, foresee this risk and modify hiring or contracting policies. We present a model of a firm allowing to estimate IC while accounting for such adjustments. We show that the risk of illness does not change the general shape and properties of the (expected) marginal productivity function. We apply our model to several illustrative examples and show that firm's adjustments impact IC in an ambiguous way, depending on detailed company/market characteristics. Sometimes the company reduces the employment (further increasing IC), yet sometimes the opposite (even generating indirect gains). Contrary to previous literature findings, teamwork and shortfall penalties may reduce IC in some settings. Our analysis highlights that IC should be split into the result of companies preparing for and actually experiencing sick leaves, at least when friction cost approach is taken. To what extent the former counts as IC may depend on the (labour and good) market structure and the interpretation of equilibrium values. These considerations are usually not addressed in applied IC assessment, which may bias the results.