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​​Abstract:

A primary role of the welfare state is to provide a safety net against adverse shocks such as becoming unemployed. We estimate the effect of a major welfare reform in the UK on mental health for unemployed claimants. In 2013 Universal Credit replaced six existing benefits, creating a simplified system of applications and payments, whilst simultaneously applying somewhat draconian policy rules including a commitment to intensive job search, a change in benefit income and a 5 week wait to receive the first benefit payment. Exploiting a staggered roll-out across areas and time, we find the welfare reform was less able to mitigate negative mental health effects from entering unemployment by 28% of a standard deviation. We decompose this effect into the proportion coming from the individual policy rules, finding that a cut in household income and increase in financial difficulties worsened - whilst increased job search intensity protected - against mental health problems from entering unemployment.​