There is robust epidemiological and clinical evidence of the harmful effects of unemployment on psychological well-being, but the mechanisms through which this occurs is still strongly debated. In addition, there is even less evidence on the impact of underemployment on mental health. Using longitudinal data collected from a cohort of 20–24 years old, the present study examines a range of employed states and investigates the role of mastery, financial hardship and social support in the relationship between labour status and depression.