Background Unemployment and economic inactivity are associated with worse mental health in the general population, but there is limited understanding of whether these relationships are different for those persons with mental or physical disabilities. The aim of this study was to assess whether there were differences in mental health by labour force status among persons with and without disabilities.

Method Over eight annual waves of the Household, Income and Labour Dynamics in Australia (HILDA) survey, a total of 2379 people with disabilities and 11 417 people without disabilities were identified. Mental health using the Mental Component Summary (MCS) from the Short Form 36 was modelled as a function of labour force status using fixed-effects regression models to control for time invariant confounding. Differences between those with and without disabilities were assessed by including an interaction term in regression models.

Results After finding evidence of effect modification, regression models were stratified by disability status. After adjustment, unemployment and economic inactivity were associated with a −1.85 (95% CI −2.96 to −0.73, p=0.001) and −2.66 (95% CI −3.46 to −1.86, p<0.001) reduction in scores of the MCS among those with a disability. For those without a disability, there were smaller declines associated with unemployment (−0.57, 95% CI −1.02 to −0.12, p=0.013) and economic inactivity (−0.34, 95% CI −0.64 to 0.05, p=0.022).

Conclusions These results suggest a greater reduction in mental health for those persons with disabilities who were unemployed or economically inactive than those who were employed. This highlights the value of employment for people with disabilities.