Mandatory sick pay provision: A labor market experiment

The question whether a minimum rate of sick pay should be mandated is much debated. We study the effects of this kind of intervention with student subjects in an experimental laboratory setting rich enough to allow for moral hazard, adverse selection, and crowding out of good intentions. Both wages and replacement rates offered by competing employers are reciprocated by workers. However, replacement rates are only reciprocated as long as no minimum level is mandated. Although we observe adverse selection when workers have different exogenous probabilities for being absent from work, this does not lead to a market breakdown. In our experiment, mandating replacement rates actually leads to a higher voluntary provision of replacement rates by employers.