The Effect of Economic Insecurity on Mental Health: Recent Evidence from Australian Panel Data

Abstract

This paper estimates the impact of economic insecurity on the mental health of Australian adults. Taking microdata from the 2001-2011 HILDA panel survey, we develop a conceptually diverse set of insecurity measures and explore their relationships with the SF-36 mental health index. By using fixed effects models that control for unobservable heterogeneity we produce estimates that correct for endogeneity more thoroughly than previous works. Our results show that exposure to economic risks has small but consistently detrimental mental health effects. The main contribution of the paper however comes from the breadth of risks that are found to be harmful. Job insecurity, financial dissatisfaction, reductions and volatility in income, an inability to meet standard expenditures and a lack of access to emergency funds all adversely affect health. This suggests that the common element of economic insecurity (rather than idiosyncratic phenomena associated with any specific risk) is likely to be hazardous. Our preferred estimates indicate that a standard deviation shock to economic insecurity lowers an individual's mental health score by about 1.4 percentage points. If applied uniformly across the Australian population such a shock would increase the morbidity rate of mental disorders by about 1.7%.