Moral hazard problems with social insurance, as well as the solution in forms of different incentives, are well established in the economic literature. For social insurance there are by now a large empirical as well as theoretical literature documenting the effect of worker incentives. Another important agent for a well functionally social insurance is employers, and an increasing number of studies show how employer incentives could be an important tool to decrease the take up rates in social insurance. However, besides effects on the take up rates, employer incentives may also affect individual wages and individual employment opportunities, effects which have almost entirely been ignored in the empirical literature. This is unfortunate, since obviously in order to design an optimal insurance all effects of different incentives have to be taken into account.

This paper fills one part of this gap in the literature, using a reform in January 1992 which introduced employer incentives in the Swedish sickness absence insurance; we investigate how employer incentives affect individual wages. The reform meant that employers’ costs increased sharply for individuals often absent, leaving the cost for individuals not so often absent unaffected. The hypothesis is that this difference in costs is reflected in individual wages. The variation introduced by the reform is exploited, in a Difference-in-Difference analysis comparing the wage increases before and after the reform for those who always works and for those who often is absent from work. Our analysis based on a long panel population database, including information on actual wages, gives no support of individual wage effects from employer incentives. This result is not a result of small variation in the employer incentives, lack in wage flexibility, nor a result of large standard errors.