Are employees at risk of layoff mentally more ill? The causal impact of fear of unemployment on psychological health

Arndt Reichert, Harald Tauchmann
RWI, Germany

The cyclicality of labor market dynamics and its impact on health has attracted a great deal of attention since the articles by Brenner that provide evidence for an inverse association of the unemployment rate and indicators of health, such as mental illness (Brenner 1973). However, more recent empirical research funds a countercyclical response of health (Laporte 2004, Ruhm 2000). One possible explanation of this phenomenon is the rise in fear of unemployment causing mental problems. We contribute to this debate by examining whether rising job insecurity causes mental illness. We estimate a fixed effects model, using individual level data for 2002, 2004 and 2006 from the German Socioeconomic Panel (GSOEP). The GSOEP is ideally suited for this analysis because it provides detailed information on individual characteristics, the worries about the security of the job and most importantly an indicator for the mental health status (the mental component summary scale). The identification strategy rests on an instrumental variable approach, where the unemployment rate at the county level serves as instrument for the employees' risk of losing their job. This framework allows us to control for time-invariant and time-variant unobserved heterogeneity as well as tackling reversed causality bias. Our preliminary results suggest that fear of unemployment significantly - yet weakly - decreases mental health. Quantile regression show that this effect increases for individuals whose mental health is at the lower tail of the distribution revealing a substantial problem for employees with mental issues.

View full paper