Does Mental Health Matter for Firm Performance? Evidence from longitudinal Japanese firm data

This study focuses on firms' profit rate, instead of This study focuses on firms' profit rate, instead of conventional self-reported subjective indices, to objectively assess the total impact of employees' mental illness on firm performance. We found the following results from a unique data set obtained by linking Japanese firms' 2004-2014 financial data to longitudinal information on their workers' mental health. First, long work hours have a small but significant effect on employee' mental health. Second, firms with higher sick leave or turnover rate of employees with mental disorders tend to have lower annual profit rates even after controlling for unobservable firm heterogeneity. These findings imply that the percentage of employees who take sick leave or leave firms due to bad mental health is the tip of the iceberg and should be considered as a proxy variable for the mental health of a firm's employees. Third, the negative effect of workers' bad mental health on firm performance is greater for firms with high fixed employment costs. These facts indicate that keeping employees' mental health in good condition is beneficial not only for employee welfare but also from a business perspective.