The Impact of Workers' Mental Health on Corporate Performance

Faculty Fellow, RIETI / Professor, Keio University

KURODA Sachiko
Professor, Waseda University

As mental disorders increase in Japan, there is growing concern about the mental health of workers. The Diet is discussing an amendment of the Industrial Safety and Health Law that would give stronger care for workers in workplaces at businesses. For example, stress checks could become mandatory (Note).

More organizations recently have been calling attention to the need for mental health research, from both medical and social science perspectives. An example is a mental health report from the Organisation for Economic Co-operation and Development (OECD). Nonetheless, there is not yet a large body of research on the relationship between work and mental health. The scarcity of this type of research may have something to do with the persistent belief that individuals are at fault for their own mental health problems, and such problems are not considered often from a business management perspective.

However, it is possible that when workers' mental health worsens, it could have an adverse impact on corporate performance. This column looks at the outcomes of our research and discusses how firms should address mental health problems.

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As part of a RIETI research project, we conducted a longitudinal survey on firms and their workers. The figure shows our results from our firm survey. Using data from approximately 400 companies, we first divided them into two groups. The first group consists of firms which report that the percentage of regular employees taking long-term leave (at least one month) due to mental health problems increased during 2004-2007. The second group consists of firms which report that the percentage did not increase during the period. The figure compares how the trends in the profit-to-sales ratio differed within the two groups.

Figure: Deterioration of Workers' Mental Health and Change in Profitability
Figure: Deterioration of Workers' Mental Health and Change in Profitability
Note: Changes during 2004-2007, percentage points

As of 2007, there was very little difference in the change in profitability between those companies where the percentage of employees taking long-term leave had risen and companies where it had not. However, data for 2008 and after show that although profitability worsened for all businesses as a result of the severe recession due to the financial crisis in 2008, the decline in profit was greater at those firms with an increase in the number of employees on leave due to mental illness problems. In other words, firms where more workers suffered mental health problems were not impacted right away, but their profitability declined markedly after a time lag. This trend was found even after controlling for differences in firms' characteristics such as business size, technological strength, and growth potential.

On average, the ratio of workers taking long-term leave due to mental health problems to total number of workers was very low, at less than 1%. Why is it then that, in spite of this low percentage, an increase in the ratio of people taking mental health leave negatively impacts corporate performance? One possible interpretation is that changes in the percentage of workers taking mental health leave are not only an indicator of changes in the mental health of those workers but also a proxy indicator for changes in the average mental health of all workers within the company.

Typically, as the mental health of workers worsens, they go through a series of stages, which starts with a decline in work efficiency, followed by increasingly missing work, coming in late and leaving early, and ultimately taking leave. A loss of efficiency on the job is referred to as presenteeism, while missing work, coming in late, leaving early, and taking leave are referred to as absenteeism. This accords with earlier research which calculated the economic cost to firms with such workers and found it to be not small.

In other words, in firms with an increasing number of employees on leave, there is a negative impact on the mental health of not just those taking leave but also the other workers who stay on the job. It is possible for both employee presenteeism and absenteeism to hurt corporate performance as a result. In fact, evidence from the longitudinal survey data on workers showed that those workers in workplaces with an increasing number of people taking mental health leave also tend to see their own mental health worsen over time.

We interpret that there are certain factors in these workplaces and firms that explain the worsening mental health of their workers. Such factors may lower firm productivity by worsening the mental health of both those on leave and other workers.

What are these workplace factors that worsen the mental health of workers? Our empirical research indicated several factors that can undermine mental health; among them, an important one is long working hours, especially unpaid overtime hours. Also, workers given very little discretionary power in conducting their work and an unclear job description or work assignment are two other factors that damages workers' mental health. We also found that when there is an atmosphere that discourages workers from leaving work on time, the mental health of the workers in such workplaces tend to be bad. The onset of mental health problems, as with many other health problems, is related to individual factors such as genetics. However, the above results did not change even after controlling for the individual's fixed effects.

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These results suggest that mental health problems should be looked at as problems not only of those workers who take leave, but also of the entire staff who are concerned with that workplace environment and work style.

On average, Japanese firms ask workers to work long hours, however, our research reveals that such work hours are sometimes inefficiently long. Adapting workplace management to correct for inefficient work styles and changing the corporate culture to reduce unpaid overtime may inprove efficiency and prevent damaging the mental health of workers as a whole. All of these things can also work together to improve corporate performance.

Furthermore, although active discussions are taking place regarding introducing a more autonomous working-hour system, there is no evidence that workers exempt from the current working-hour regulations in Japan work any fewer hours based on our study. On the contrary, during periods of recession, more work goes to exempt workers who do not receive overtime pay. This makes it more likely that they will work long hours. This trend is especially prominent among workers with little bargaining power. Therefore, expanding the scope of exempt workers could in fact encourage longer working hours and cause more workers to suffer mental health problems. Any institutional reform including the scope of targeted workers has to be undertaken carefully.

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Up to now, many Japanese firms under typical Japanese employment practices have been making human capital investment in their employees and collecting the returns from the investment later, over the long term. In the sense that they make sure such investment is collected, it is rational that they do not terminate employment contracts immediately when their employees' mental health worsens, keep them employed and allow them to take leaves, and wait for their recovery. It is also advantageous for such workers that they can receive medical treatment while their job security is guaranteed.

However, it is important to recognize the fact that some workers within a company are taking mental health leave is a proxy indicator of the mental health of the entire staff. Considering the possibility of worker mental health impacting corporate performance, it is necessary to deal with mental health problems socially through the medical system, and it is also necessary that firms deal with it as a managerial issue.

In Japan, regular employees in particular tend to work longer hours and stay longer with their employers than their counterparts in other countries. Therefore, it seems likely that the mental health of these individuals is more easily affected by their work styles and their firms or workplace.

In recent years, an increasing number of firms have been taking steps at various levels to achieve work-life balance for their workers. Up to now, mental health measures usually were perceived as different in character from these initiatives. However, so-called work-life conflict (the opposite of work-life balance) has the potential to worsen workers' mental health. This means it is important to recognize that any improvement in working styles not only helps to achieve work-life balance but also to prevent mental health from worsening.

Research on mental health from the economic perspectives has not yet been much accumulated, and the research described in this column is also still under development. It is necessary to learn from the knowledge from other fields, such as medicine, sociology, and management, and integrate it with what has been accumulated from economics. Conducting advanced economics research based on data on firms and workers, and disseminating such research results interdisplinary may be the key to this problem.

>> Original text in Japanese

* Translated by RIETI.

June 13, 2014 Nihon Keizai Shimbun (co-authored with KURODA Sachiko)

  • ^ In June 2014, the Diet passed the amendment of the Industrial Safety and Health Law, that mandates firms to check employees' stress levels every year.

December 16, 2014