Can positive income anticipations reverse the mental health impacts of negative income anxieties?

Prospect theory suggests losses are more influential than equivalent sized gains in individual level decision-making. Extending this literature, we use longitudinal National Population Health Survey data (2000-01 to 2010-11) to investigate whether experienced psychological distress impacts of greater economic insecurity for working age Canadians can be fully reversed by equal sized increases in security. Economic insecurity (security) is defined as the probability of an annual income decrease (increase) of 25 percent or more. Our identification strategy employs fixed effects estimation and a set of instruments to control for unobserved heterogeneity and reverse causality. Results suggest that an initial one standard deviation increase in economic insecurity predicts a rise in psychological distress of about 0.57 standard deviations for males and 0.54 standard deviations for females. Good economic news of a similar magnitude has considerably less impact, reducing psychological distress by 0.16 and 0.35 standard deviations for males and females respectively.