Labor Cost of Mental Health: Evidence from Chile

Individuals’ labor market performance can be affected directly by their mental health through labor market participation and productivity. Moreover, poor mental health of workers limits labor mobility and hence efficiency and economic growth. Although there is some empirical evidence linking mental health and labor market performance in high-income countries, few papers provide evidence from developing countries, despite the fact that health support is typically weak. We investigate the effects of poor mental health on labor market in Chile, where depression rate reaches 17%. We build a mental health status index and control confounding effects by using a large set of individual and household socio-economic, labor and health characteristics. We address causality identification by using instrumental variables at the individual level (number of relatives that passed away, relatives diagnosed with depression), and at the municipality level (life expectancy, intra-family violence rate). Our results indicate that poor mental health could reduce labor market participation by 20%. Additionally, we find that poor mental health could reduce wages by 60% for women and 50% for men. We also find heterogeneous effects among workers due to economic sector, were private sector workers with poor mental health suffer larger impacts on wages than public sector workers.