Objectives The aims of this study were to (i) investigate the impact of paid employment on self-rated health, self-esteem, mastery, and happiness among previously unemployed persons with common mental health problems, and (ii) determine whether there are educational inequalities in these effects. Methods A quasi-experimental study was performed with a two-year follow-up period among unemployed persons with mental health problems. Eligible participants were identified at the social services departments of five cities in The Netherlands when being diagnosed with a common mental disorder, primarily depression and anxiety disorders, in the past 12 months by a physician (N=749). Employment status (defined as paid employment for ≥12 hours/week), mental health [Short Form 12 (SF-12)], physical health (SF-12), self-esteem, mastery, and happiness were measured at baseline, after 12 months and 24 months. The repeated-measurement longitudinal data were analyzed using a hybrid method, combining fixed and random effects. The regression coefficient was decomposed into between- and within-individual associations, respectively. Results The between-individuals associations showed that persons working ≥12 hours per week reported better mental health (b=26.7, SE 5.1), mastery (b=2.7, SE 0.6), self-esteem (b=5.7, SE 1.1), physical health (b=14.6, SE 5.6) and happiness (OR 7.7, 95% CI 2.3-26.4). The within-individual associations showed that entering paid employment for ≥12 hours per week resulted in better mental health (b=16.3, SE 3.4), mastery (b=1.7, SE 0.4), self-esteem (b=3.4, SE 0.7), physical health (b=9.8, SE 2.9), and happiness (OR 3.1, 95% CI 1.4-6.9). Among intermediate- and high-educated persons, entering paid employment had significantly larger effect on mental health than among low-educated persons. Conclusions This study provides evidence that entering paid employment has a positive impact on self-reported health; thus work should be considered as an important part of health promotion programs among unemployed persons.