Objectives Entry into employment may be a time when a young person's well-being and mental health is challenged. Specifically, we examined the difference in mental health when a young person was "not in the labor force" (NILF) (ie, non-working activity such as participating in education) compared to being in a job with varying levels of psychosocial quality. Method The data source for this study was the Household Income and Labor Dynamics in Australia (HILDA) study, and the sample included 10 534 young people (aged ≤30 years). We used longitudinal fixed-effects regression to investigate within-person changes in mental health comparing circumstances where individuals were NILF to when they were employed in jobs of varying psychosocial quality. Results Compared to when individuals were not in the labor force, results suggest a statistically significant decline in mental health when young people were employed in jobs with poor psychosocial working conditions and an improvement in mental health when they were employed in jobs with optimal psychosocial working conditions. Our results were robust to various sensitivity tests, including adjustment for life events and the lagged effects of mental health and job stressors. Conclusions If causal, the results suggest that improving the psychosocial quality of work for younger workers will protect and promote their wellbeing, and may reduce the likelihood of mental health problems later on.