Macroeconomic and Welfare Effects of Sick Leave Benefits in South Korea: A General Equilibrium Analysis with Alternative Financing Mechanisms

Using a calibrated overlapping generations dynamic stochastic general equilibrium (OLG-DSGE) model for South Korea—an OECD outlier lacking mandatory paid sick leave—we examine the macroeconomic and welfare effects of introducing such benefits. The model features heterogeneous agents facing distinct disability shocks (temporary work incapacity triggering sick leave eligibility) and health status shocks (affecting medical costs). Simulating benefits at varying replacement rates, we assess trade-offs under NHI premium hikes, firm revenue taxes, and lump-sum taxes. We find a stark tension between insuring disabled workers (welfare gains up to 24%) and aggregate efficiency, heavily influenced by financing. NHI funding maximizes disabled worker welfare but cuts output by 2.72%; firm taxes yield modest overall welfare gains (+0.12%) despite larger output losses (-2.86%); lump-sum taxes minimize output decline (-0.13%) but offer the least insurance. These findings highlight the critical role of financing mechanisms in shaping the trade-offs inherent in sick leave policy, offering insights relevant beyond the specific case study.