In this study, we examine the relationship between temporary employment and employee mental health and how the prevalence of temporary work within organizations moderates the relationship. Drawing on segmentation theory, we argue that segmentation between temporary and permanent workers decreases in organizations wi high temporary work prevalence. We hypothesize that a reduction in workplace segmentation diminishes the adverse effects of temporary employment on mental health. Using a population-level employer-employee dataset from the Netherlands, we employ the transition from temporary to permanent employment in a difference-in-difference design while using psychotropic medication prescriptions as a proxy for mental health disorders. Our study finds no population-wide effect of temporary employment on mental health. Instead, we document that the impact of temporary employment critically depends on the firm-level prevalence of temporary work. In organizations with low prevalence rates, transitioning to a permanent contract reduces medication usage, whereas, in those with high temporary work prevalence, no medication reduction is observed.
