Mental Health and Labour Market Participation: Evidence from IV Panel Data Models

28 Pages Posted: 26 Apr 2010

See all articles by Paul Frijters

Paul Frijters

Queensland University of Technology - School of Economics and Finance

David W. Johnston

Monash University

Michael A. Shields

University of Melbourne - Department of Economics; IZA Institute of Labor Economics

Abstract

A large body of empirical research links mental health and labour market outcomes; however, there are few studies that effectively control for the two-way causality between work and health and the existence of unobserved individual characteristics that might jointly determine health and labour market outcomes. In this study, we estimate the effect of mental health on labour market participation using various models, including instrumental variable models that exploit individual variation observed in panel data. We find robust evidence that a reduction in mental health has a substantial negative impact on the probability of actively participating in the labour market. We calculate that a one standard deviation decrease in mental health decreases the probability of participation by around 17 percentage points. This effect is larger for females and for older individuals. We therefore provide robust evidence that there are substantial costs due to the lost productivity resulting from poor mental health.

Keywords: measurement error, mental health, labour market participation, causality

JEL Classification: I10, J21, J22

Suggested Citation

Frijters, Paul and Johnston, David W. and Shields, Michael A., Mental Health and Labour Market Participation: Evidence from IV Panel Data Models. IZA Discussion Paper No. 4883. Available at SSRN: https://ssrn.com/abstract=1595524

Paul Frijters (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia
(07) 3864 9364 (Phone)
(07) 3864 1500 (Fax)

HOME PAGE: http://www.bus.qut.edu.au/paulfrijters/index.jsp

Michael A. Shields

University of Melbourne - Department of Economics ( email )

Victoria 3010, 3010
Australia
+61 3 8344 4656 (Phone)
+61 3 8344 6899 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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