The labour market consequences of poor mental health: new evidence from panel data

Abstract: What are the labour market costs of poor mental health? When one-in-four adults are estimated to have a mental health disorder in any one year, this is a substantive economic question. However, it is a question that is difficult to answer because of several empirical issues: two-way causality between health and work; unobservable confounding factors; and measurement error in survey measures of mental health. We overcome these empirical issues by combining ten waves of high-quality panel data with a novel instrumental variable model that allows for individual-level fixed-effects. The results indicate that poor mental health has a large negative effect on employment, with a one standard deviation decline in mental health reducing employment by 30 percentage-points. Further investigations suggest that this effect is predominantly a supply rather than a demand side response. We also find significant positive effects of poor mental health on presenteeism and job stress.