Down and out: estimating the relationship between mental health and unemployment

We utilized a unique dataset of Montreal residents to estimate the relationship between employment and mental health, controlling for endogeneity. We applied a maximum likelihood, simultaneous equation generalized probit model to estimate jointly the determinants of an individual's latent index of employability and their mental health as measured by the Psychiatric Symptom Index (PSI). The likelihood function was adjusted to account for the fact that individuals were sampled based on their employment status, and also for the fact that repeated observations of individuals in different periods were used in the analysis. We found tangible beneficial effects of mental health on employability. In addition, employment appears to improve mental health. The ML estimates of the endogenous relationship between employment and mental health indicate that OLS estimates are biased upwards, but the effects of unemployment on deteriorating mental health are not spurious.