Background Underemployment (defined as when a person in paid employment works for fewer hours than their desired full working capacity) is increasingly recognised as a component of employment precarity. This paper sought to investigate the effects of underemployment on the mental health of people with disabilities.

Methods Using 14 waves of the Household, Income and Labour Dynamics in Australia survey, we used fixed-effects models to assess whether the presence of a disability modified the association between underemployment and mental health. Both disability and underemployment were assessed as time-varying factors. Measures of effect measure modification were presented on the additive scale.

Results The experience of underemployment was associated with a significantly greater decline in mental health when a person reported a disability (mean difference −1.38, 95% CI −2.20 to −0.57) compared with when they did not report a disability (mean difference −0.49, 95% CI −0.84 to −0.14). The combined effect of being underemployed and having a disability was nearly one point greater than the summed independent risks of having a disability and being underemployed (−0.89, 95% CI −1.75 to –0.03).

Conclusion People with disabilities are more likely to experience underemployment and more likely to have their mental health adversely affected by it. There is a need for more research and policy attention on how to ameliorate the effects of underemployment on the mental health of persons with disabilities.