Keeping the Production Line Running: Internal Substitution and Employee Absence

We postulate that the production losses from absence depend on firms’ ability to internally substitute for absent workers, incentivizing firms to keep absence low in jobs with few substitutes. Using Swedish employer–employee data we show that absence is substantially lower in such positions conditional on establishment and occupation fixed effects. The result is driven by employee adjustments of absence to substitutability, and sorting of low (high) absence workers into (out of) positions with few substitutes. These findings highlight that internal substitution insures firms against production disruptions and that absence costs are important aspects of firms’ hiring and separation decisions.