When It Rains It Drains: Psychological Distress and Household Net Worth

Abstract

This paper establishes a sizeable negative effect of poor mental health on individuals' net worth. In a representative panel of U.S. households, we find that a one standard deviation (or four unit) increase in Kessler's K6 psychological distress level decreases net worth by 13 percent and increases by 5 percent the baseline risk of being in deficit net worth, where levels of debt outstrip the value of assets. Survival analyses further show that psychological distress accelerates the entry into and prolongs the stay in deficit net worth states, as well as increasing the probability of re-entry into deficit. Using a Blinder-Oaxaca decomposition, we find that differences in level of savings, medical debt and labor income predominantly explains the lower net worth and higher likelihood of deficit net worth of individuals with high psychological distress. Our findings highlight the significant longer-term implications of mental health on the net worth of individuals.

Keywords: Psychological distress; Mental health; Negative net worth; Household wealth; Financial distress; Survival analysis

JEL Classification: D14, D31, I14