Having discussed the two sides of the market for absence in the last two chapters, we now put the two together to produce a theory of how the market operates. We have also discussed the rationale as to why firms might find it worthwhile to provide sick pay, and later in this chapter we argue that there seems to be no pressing reason an efficient market for sick pay (or, to be more precise, insurance against loss of income due to sickness) should not be organised, with firms providing experience-rated sick pay to their own workers.

Sorting in the market for absence

We would have liked this chapter to follow on from the previous two to form a seamless whole, in which firms make decisions about hiring and remuneration systems, and households make decisions about labour supply and absence. Chapter 2 argued that the supply of absence arises because it is cheaper for firms to agree to some level of absence than for them not to. The demand arises because of a multitude of influences on workers and their households, which cause variations in the workers' valuation of time or in their costs of attendance. Since a full equilibrium approach to modelling this market is impossible in the current state of knowledge, we follow the approach of Coles and Treble (1996), in which the demand side of the market is modelled simply as a set of households with heterogeneous utilities, and the supply side as a set of firms with heterogeneous technologies.