Mental health, work incapacity and State transfers: an analysis of the British Household Panel Survey

The UK has experienced substantial increases in the number of individuals claiming work incapacity benefit (IB) and the proportion of people claiming IB for mental health reasons. Following high-profile reports claiming that intervention would cost the State nothing, the Government has increased the availability of psychological therapies. The cost-neutrality claim relied on two statistics: the proportion of IB claimants diagnosed with mental and behavioural disorders; and estimates of the costs to the State of periods on IB. These are cross-sectional associations. We subject these two associations to more rigorous longitudinal analysis using nationally representative data from seventeen waves (1991-2007) of the British Household Panel Survey (BHPS). We model the effect of depression on (a) State transfers and (b) the probability of being on IB whilst controlling for covariates and unobservable heterogeneity. Our results reveal that cross-sectional associations with depression are substantially cnfounded. The estimated effects of becoming depressed on State transfers reduce by 83% and 88%, and on the probability of claiming IB drop to just 0.4 and 0.7 percentage points, for males and females respectively. We conclude that the stated benefits of reducing depression for the State and for labour market participation have been substantially over-estimated.