What does absenteeism really cost? An economic analysis of firm losses

            Theoretical and empirical research carried out by economists has confirmed that worker absence rates are equilibrium outcomes; absence rates are endogenously determined by employers and employees.  However, while absenteeism is widely regarded to be very costly, few of the economic models documented in the literature have specifically focused on providing a conceptual framework for identifying and understanding the real losses imposed upon firms by absent workers.  Moreover, the typical study as carried out by a major consulting firm or non-academic organization that seeks to measure the consequences of absenteeism is not conceptually well grounded.  This purpose of this paper is to develop an economic model that provides a conceptual framework that will contribute to our understanding of unplanned absenteeism and its real consequences. 

             The model assumes an annual labor contract that accounts for the benefits and costs of absenteeism perceived by both the employer and the employees.  The utility of the typical employee is assumed to be a function of wage income, sick pay, the value of time away from work, and the intrinsic rewards from work effort.  And assuming perfect competition, the employer’s total revenue will be fully absorbed by the cost of capital, total wage costs, sick pay, and the additional costs created by absent workers.   The model therefore implies that the utility maximizing contract for employees will be consistent with the profit maximizing outcome for the employer, and the solution of the model  is expected to generate conditions for the equilibrium levels of employment, the number of employees working, and hence, the number of absences over the contract period. 

             The implications of the model will be interpreted to clarify that for competitive firms the total costs typically associated with absenteeism do not accurately indicate the economic losses created by unplanned absenteeism; costs of unplanned absenteeism that are based upon accounting and employment data and do not account for the firm’s economic environment are typically overstated.  Accordingly, the model will imply a framework for arriving at a better understanding of the real costs of absenteeism.  Moreover, with greater understanding of mechanisms that lead to the equilibrium absence rates, the model will generate implications that will allow us to identify more effective strategies for employers in their efforts to manage absenteeism.