Paths to Lower Pay: Physical and Mental Health, and the Role of Financial Difficulty

This publication is from the UCL Institute for Global Prosperity

Authors: Nikolaos Tzivanakis, Nilufer Sari Aslam, Marcell Kurbucz, Henrietta L Moore, and Sffron Woodcraft.

Description

Poor health is associated with lower earnings, but the mechanisms linking health to hourly productivity are not well understood. Physical and mental health may operate through different pathways, with different implications for policy. This paper disaggregates both health and earnings to map the within-person predictive architecture linking health, financial difficulty, and productivity. 

Using 15 waves of the UK Household Longitudinal Study (2009 to 2024; 169,087 person-waves from 23,537 employed individuals), we estimate person fixed effects models with lagged predictors, Granger causality tests, and Karlson-Holm-Breen mediation decompositions. 

Three findings emerge. First, mental health has no independent predictive power for future hourly earnings once financial difficulty is accounted for, while physical health retains a direct channel. Financial difficulty is the sole node connecting mental health to earnings in this system. 

Second, financial deterioration reduces hourly pay by 2.7% but financial improvement does not restore it, indicating asymmetric scarring rather than contemporaneous cognitive load. 

Third, an identity-consistent decomposition shows that financial difficulty reduces both hourly pay and hours worked, with 64% of the monthly earnings penalty operating through the hourly channel and no compensating labour supply response. 

The mediation share increases when the GHQ-12 replaces the SF-12 MCS as the mental health measure, which is inconsistent with common method variance and consistent with a genuine mediating pathway. 

The results suggest that rapid income protection at the point of financial deterioration may be more effective at preserving productivity than mental health treatment alone or post-hoc recovery support.

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