Britain’s national minimum wage has not only raised the pay of low-paid employees. It has also led to a reduction in the rate of these employees absence through sickness and hence improved their productivity. That is the finding of new research by Marco Ercolani and Martin Robson, presented at the Royal Economic Society Conference 2007. This effect might help to explain why the introduction of the minimum wage was greeted with apparent equanimity by many employers.
Employee sickness absence is widely recognised as a major problem for the economy. In recent years, for example, it has been calculated that the direct costs of sickness absence in terms of the value of lost output amount to over £11 billion per annum; around 1% of the country’ annual GDP.
On top of this, there are the indirect costs such as the loss of employee morale among those required to cover for absent colleagues. While many instances of employee sickness absence represent genuine cases of ill health, a significant proportion almost certainly does not.
The problem is that the latter cannot easily be distinguished from the former. So what can be done to discourage the shirkers and encourage them to turn up for work? This is an issue with which employers and governments have wrestled for a long time.
Studies by economists have demonstrated that there tends to be a negative relationship between employees pay and their rate of sickness absence: low-paid employees are more likely to be absent than those on higher earnings. So does this mean that paying higher wages will help to reduce employee sickness absence?
Unfortunately, the answer to this question is not straightforward. The negative relationship between employee pay and sickness absence might be observed because those with a poor record of absenteeism are less productive and are less likely to be promoted.
To answer the question properly, what is needed is the ability to study the effect of some kind of external shock that has the effect of raising an employees pay regardless of his or her level of productivity. Such an opportunity is provided by the introduction of the national minimum wage in April 1999.
The introduction of the minimum wage at a rate of £3.60 per hour for adults and £3.00 per hour for employees aged 18-2 is estimated to have raised the pay of around 1.2 million low-paid employees. Using data from the nationally representative Labour Force Survey, this study examines the effect of the change in the real value of employee pay induced by the introduction of the minimum wage on the rate of employee sickness absence.
The research finds that after controlling for the potential two-way relationship between sickness absence and earnings, a 1 percentage point increase in the rate of growth of the real value of employee earnings reduces the rate of sickness absence by about 0.05 percentage points, on average.
The introduction of the minimum wage is estimated to have raised the pay of those low-paid employees who were directly affected by around 4%. Thus, the introduction of the minimum wage is estimated to have led to a reduction in the rate of employee sickness absence of around 0.2 percentage points, on average a little under one-tenth of the average rate of sickness absence over the period studied.
By reducing the rate of employee sickness absence, the introduction of the minimum wage can therefore be seen to have had a beneficial effect on the productivity of low-paid employees, an effect that has not previously been highlighted in studies of the impact of minimum wage legislation. This effect might help to explain why the introduction of the minimum wage was greeted with apparent equanimity by many employers.
Notes for editors: Does Raising the Pay of Low-Wage Employees Reduce their Rate of Sickness Absence? Evidence from the Impact of Minimum Wage Legislation by Marco Ercolani and Martin Robson was presented at the Royal Economic Society’s 2007 annual conference at the University of Warwick, 11-13 April.
Marco Ercolani is at the University of Birmingham. Martin Robson is at Durham University.
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