The effect of mental health on early retirement decisions: Evidence from Australia

Health and labour supply are interconnected; However, research has predominantly focused on the impact of physical health, leaving a gap in understanding the role of mental health problems. This study addresses this gap by examining the effect of mental health on early retirement decisions using data from the Household, Income, and Labour Dynamics in Australia (HILDA) Survey. We use both linear probability models and a discrete-time hazard approach. While linear models estimate the average effect, the discrete-time hazard model tracks initially employed individuals aged 50 to 64 over time until they retire early or reach retirement age. To mitigate potential bias arising from the timing of reporting of mental health and retirement decisions, lagged measures of mental health are applied, with respect to the temporal sequence of events. To address measurement bias, the association between our derived mental health variable and other objective psychiatric measures is examined. Furthermore, we include the death of a close friend as an instrument for mental health status, helping us validate and strengthen causal findings of our study. Lastly, we examine whether unobserved heterogeneity poses a problem in our analysis by estimating models with and without unobserved heterogeneity. Our findings indicate a significant and positive causal impact of poor mental health on early retirement decisions, which is also supported by the nonlinear analysis. To explore potential gender heterogeneity, separate analyses are conducted for males and females. The observed differences in the results between the two groups support the assumption of gender-specific effects. These findings suggest that poor mental health has a significant and potentially causal impact on premature exit from the labour market, particularly among men. The results highlight the importance of effective mental health management in supporting longer working lives.