Does Sickness Compensation Matter for Economic Inequality? : A Counterfactual Analysis

Abstract

As of today, Norway stands alone in guaranteeing full sick leave compensation from the first day of illness. With a sick leave rate of 7 percent and sickness payments at 2.4 percent of GDP (Markussen et al, 2009), providing such economic security based on the right of equal opportunity not only costs but weakens work incentives. Reduced compensation provides a seldom considered means of both lowering sick leave and its costs but would such gains come at the expense of economic equality? Register data from Statistics Norway allows for the selection of men thirty years of age in 1993, still alive and living in Norway in 2005 –including their yearly incomes and welfare benefits. This study compares the distribution of actual to fictional earning streams following reduced compensation using the Gini coefficient and income ratios between population percentiles. The analysis ignores likely behavioral effects and the arising differences thus constitute a possible ceiling value. The results indicate that the loss in total income impacts relatively few of the population substantially and the tenth percentile more than the median and ninetieth percentiles. A decrease in compensation from full to eighty and zero percent of working income results in a respective increase in the Gini from 0.2535 by 0.12 and 0.83 percentage points. Sickness compensation might not play as influential a role in promoting greater economic equality as so often assumed.