1. 1 Work Absence in Europe: An Update Lusine Lusinyan Leo Bonato International Monetary Fund Rome, June 10, 2010 Disclaimer: The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.

2. 2 Motivation Based on Lusinyan-Bonato (2007) Concern about trends in labor supply in Europe Increase in participation Increase in participation Decrease in average hours worked Decrease in average hours worked Looking ahead Negative impact of ageing Negative impact of ageing Growth potential will decline under reasonable assumptions on productivity Growth potential will decline under reasonable assumptions on productivity Shrinking tax bases will undermine generosity of welfare systems Shrinking tax bases will undermine generosity of welfare systems

3. 3 Participation and hours worked

4. 4 Policies to increase labor supply Increase labor force participation Increase labor force participation Address working time utilization Address working time utilization Contractual/usual hours of work Contractual/usual hours of work Actual hours worked Actual hours worked  Positive difference: work absence

5. 5 Plan of the presentation I.Overview of work/sickness absence II.Some facts about sickness absence and its determinants III.Econometric evidence IV.Conclusions

6. 6 I. Overview Declining hours worked must reflect, to some extent, preferences Declining hours worked must reflect, to some extent, preferences If anything, taxes have declined and welfare systems have become less generous (Blanchard, 2004) If anything, taxes have declined and welfare systems have become less generous (Blanchard, 2004) The gap with the US shows that labor supply may be affected by tax distortions (Prescott, 2004) or labor market institutions (Alesina and others, 2005) The gap with the US shows that labor supply may be affected by tax distortions (Prescott, 2004) or labor market institutions (Alesina and others, 2005) Social insurance systems play an important role: they are costly, generally not well targeted, and unlikely to be optimal (Treble, 2003) Social insurance systems play an important role: they are costly, generally not well targeted, and unlikely to be optimal (Treble, 2003)

7. 7 What determines work/sickness absence? Literature mostly focuses on labor supply: Brown and Sessions (1996), Allen (1981), Leigh (1985), Dunn and Youngblood (1986), Drago and Wooden (1992), Barmby et al. (2002) Labor force characteristics (age, gender, health) Labor force characteristics (age, gender, health) Non-labor income Non-labor income Unemployment/cyclicality Unemployment/cyclicality Disciplining effect of unemployment Disciplining effect of unemployment More sick-prone people in expansion (Arai and Skogman Thoursie, 2001) More sick-prone people in expansion (Arai and Skogman Thoursie, 2001) Work arrangements Work arrangements Sickness insurance provisions Sickness insurance provisions Ample evidence of moral hazard: Henrekson and Persson (2004); Johansson and Palme (1996, 2002); Skogman Thoursie (2002); Andren (2001) Ample evidence of moral hazard: Henrekson and Persson (2004); Johansson and Palme (1996, 2002); Skogman Thoursie (2002); Andren (2001) Impact of employment protection Impact of employment protection Ichino and Riphahn (2004) Ichino and Riphahn (2004)

8. 8 II. Some facts about sickness absence and its determinants

9. 9 Sickness absence varies across countries in Europe (Full-time employees absent due to sickness as a percentage of total employed, 2000–2008)

10. 10 Sickness absence (Full-time employees absent due to sickness as a percentage of total employed, 1983–2008)

11. 11 Sickness absence (cont.) (Full-time employees absent due to sickness as a percentage of total employed, 1995–2008)

12. 12 Sickness absence in Italy (Full-time employees absent due to sickness as a percentage of total employed, 1992–2008)

13. 13 Some support for pro-cyclicality of sickness absence (Vertical axis: sickness absence rate; horizontal axis: unemployment gap)

14. 14 Sickness insurance systems have become less generous

15. 15 Employers’ sharing the costs of public insurance scheme can create an incentive to reduce sickness absence

16. Cost to the public finances (Percent of GDP) 16

17. 17 Working time arrangements may affect the choice of work effort

18. 18 Absence increases with labor force participation and share of female and elderly but no clear relation with health (Vertical axis: sickness absence rate; 2000–2008) (Vertical axis: sickness absence rate; 2000–2008)

19. 19 Some observations for Italy Sickness absence in Italy has been among the lowest in Europe Sickness absence in Italy has been among the lowest in Europe Absence in public sector is on average over 20 percent higher than in total employment—the difference is among the largest in Europe Absence in public sector is on average over 20 percent higher than in total employment—the difference is among the largest in Europe Sickness absence rate doubled in 2002–2006 and declined somewhat afterwards Sickness absence rate doubled in 2002–2006 and declined somewhat afterwards Possible cyclical impact Possible cyclical impact Several factors could explain low sickness absence rate Several factors could explain low sickness absence rate Lower labor force participation, especially for female Lower labor force participation, especially for female Lower share of employees over 55 Lower share of employees over 55 Better health status Better health status Lower usual hours worked Lower usual hours worked Higher cost to employers (industry structure) Higher cost to employers (industry structure) Increasing share of temporary contracts with little employment protection Increasing share of temporary contracts with little employment protection

20. 20 III. Econometric evidence Only a few cross-country comparative studies on work absence: Only a few cross-country comparative studies on work absence: Drago and Wooden (1992), using micro database from 15 plants in U.S., Canada, New Zealand, and Australia, find higher absence rates among women, full-time, low-wage, and long- tenure employees. Also, absence is positively correlated with shiftwork, generosity of sick leave entitlements, and better labor market options Drago and Wooden (1992), using micro database from 15 plants in U.S., Canada, New Zealand, and Australia, find higher absence rates among women, full-time, low-wage, and long- tenure employees. Also, absence is positively correlated with shiftwork, generosity of sick leave entitlements, and better labor market options Barmby et al. (2002) LFS sickness absence data for eight European countries and Canada—similar conclusions, also robust positive relationship with usual hours worked Barmby et al. (2002) LFS sickness absence data for eight European countries and Canada—similar conclusions, also robust positive relationship with usual hours worked Bergendorff et al. (2004) aggregate long-term sickness absence data from LFS for eight European countries—similar results, and temporary workers less absent, but no clear relationship with health status. Bergendorff et al. (2004) aggregate long-term sickness absence data from LFS for eight European countries—similar results, and temporary workers less absent, but no clear relationship with health status. This paper: This paper: broader country coverage broader country coverage static and dynamic panel data models static and dynamic panel data models novel datasets on sickness insurance provisions and costs to employers, also controlling for labor market regulations novel datasets on sickness insurance provisions and costs to employers, also controlling for labor market regulations

21. 21 The model Combines labor supply and demand Combines labor supply and demand Augments the determinants of the labor- leisure choice by a number of institutional characteristics: Augments the determinants of the labor- leisure choice by a number of institutional characteristics: generosity of paid leave provisions generosity of paid leave provisions employment protection employment protection Looks at differences in the impact of publicly vs. privately financed insurance on absence Looks at differences in the impact of publicly vs. privately financed insurance on absence

22. 22 Main hypotheses to test Replacement rate (+) Replacement rate (+) Contractual hours (+) Contractual hours (+) Employment protection (+) Employment protection (+) Unemployment rate (–) Unemployment rate (–) impact depends on employment protection: impact depends on employment protection: stronger employment protection  smaller impact stronger employment protection  smaller impact Unemployment benefit (+) Unemployment benefit (+) impact depends on employment protection: impact depends on employment protection: stronger employment protection  smaller impact stronger employment protection  smaller impact Privately financed insurance Privately financed insurance impact depends on model assumptions (elasticity of probability of keeping the job with respect to absence) impact depends on model assumptions (elasticity of probability of keeping the job with respect to absence) Utility function characteristics Utility function characteristics age, health age, health

23. 23 The data Total sickness absence (short-term and long-term) – Eurostat LFS (NewCronos) Total sickness absence (short-term and long-term) – Eurostat LFS (NewCronos) Employment and demographic data – ILO’s KILM, OECD Health Data Employment and demographic data – ILO’s KILM, OECD Health Data Welfare programs – Scruggs (2004) “Comparative Welfare Entitlements Data Set” Welfare programs – Scruggs (2004) “Comparative Welfare Entitlements Data Set” Labor market institutions – WEO (based on Nickell and Nunziata, 2001), Scruggs (2004) Labor market institutions – WEO (based on Nickell and Nunziata, 2001), Scruggs (2004) Sickness insurance cost to employers – U.S. SSA, “Social Security Programs Throughout the World” Sickness insurance cost to employers – U.S. SSA, “Social Security Programs Throughout the World”  Unbalanced panel of N=18 countries, (1983-2002, 1995- 2002)

24. 24 Empirical strategy absence rate for country-gender pair i at time t vector of exogenous covariates vector of predetermined and endogenous covariates (similar to lagged dependent variable) both gender and country specific both gender and country specific only country specific only country specific unobserved fixed effect disturbance term Static and dynamic panel data models, controlling for endogeneity and fixed effects. In a general setup:

25. 25 Estimation and robustness checks Static panel data models (FE, RE, pooled OLS) Static panel data models (FE, RE, pooled OLS) Appropriateness of RE and test of serial correlation Appropriateness of RE and test of serial correlation Adjust for within-group correlation in disturbances Adjust for within-group correlation in disturbances Endogeneity tests Endogeneity tests Robustness to country sample Robustness to country sample Robustness to the type of absence Robustness to the type of absence Dynamic panel data (DPD) models (AB GMM, AH IV, BB) Dynamic panel data (DPD) models (AB GMM, AH IV, BB) Different sets of instruments Different sets of instruments Robust s.e. Robust s.e. Robustness to country sample Robustness to country sample Robustness to the type of absence Robustness to the type of absence Test for non-stationarity (panel UR tests) Test for non-stationarity (panel UR tests)

26. 26 Summary of estimation results Determinants of sickness absence SignNotes Lagged absence (+) highly significant LFPR(+) positive lagged LFPR Age structure (+) expected sign but insignificant Life expectancy (-) positive lagged impact Part-time employment (PTE) (-)significant Usual hours (+) highly significant Usual hours*PTE (-) but (+) if only PTE included Unemployment gap (-)Sweden Sickness benefit (+) highly significant, Sweden Unemployment benefit (-) or insignificant Employer sick pay (-)significant Union density (+) highly significant Union density*UE gap (+) expected sign but insignificant Union density*Employer pay (+) significant but small

27. 27 IV. Conclusions High sickness absence explained by high participation but not only High sickness absence explained by high participation but not only Strong impact of usual hours Strong impact of usual hours  Reducing contractual hours may not be inconsistent with policies to reduce absence Sickness insurance incentives and employment protection matter Sickness insurance incentives and employment protection matter Interaction between social security and labor market institutions is important Interaction between social security and labor market institutions is important

28. 28 Further research Private vs. government financed compensation systems Private vs. government financed compensation systems Role of labor market institutions Role of labor market institutions Data Data labor market institutions, absence data, private vs. public employment labor market institutions, absence data, private vs. public employment