What explains the negative effect of unemployment on health? An analysis accounting for reverse causality

The unemployed are often in poorer health than their employed counterparts. This cross-sectional correlation is often attributed to a causal effect of unemployment on health. Recent research analyzing longitudinal data often supports alternative explanations, such as spurious correlation and/or selection of unhealthy workers into unemployment (i.e., reverse causality). In this paper, we apply a dynamic panel data estimator (system GMM) to account for both unobserved confounders and reverse causality. Despite some evidence for health selection, we still find strong support for the causality thesis. Furthermore, we show that the adverse health effect is partially explained by the loss of self-perceived social status due to unemployment but not by the loss of household income or social contacts.