To derive small-area, or contextual, measures of the local social environment using benefits data from the UK Department of Work and Pensions and to investigate whether (1) the mental health status of individuals is associated with contextual measures of low income, economic inactivity, and disability, after adjusting for personal risk factors for poor mental health, (2) the associations between mental health and context vary significantly between different population sub-groups.

Data from the Welsh Health Survey 1998 were analysed in multilevel Normal response regression models of 24,975 adults aged under 75 years living in 833 wards in Wales (mean population 3,500). The mental health outcome measure was the Mental Health Inventory (MHI-5). The age-standardised ward-level benefits data available were the means tested Income Support and Income-based Job Seekers Allowance, and the non-means tested Incapacity Benefit, Severe Disablement Allowance, Disability Living Allowance and Attendance Allowance.

Each contextual variable was significantly associated with individual mental health status after adjusting for individual risk factors, so that living in a ward with high levels of claimants was associated with worse mental health. The non-means tested benefits that were proxy measures of economic inactivity from permanent sickness or disability showed stronger associations with individual mental health than the means tested benefits. All contextual effects were significantly stronger in people who were economically inactive and unavailable for work.

This study provides evidence for substantive contextual effects on mental health, and in particular the importance of small-area levels of economic inactivity and disability.