The Prince's Trust's new Macquarie Youth Index reveals that just under half of young people not in work (48%) say that unemployment has caused problems like self harm and insomnia.
It found they were more likely to self harm or suffer panic attacks 12 months into unemployment.
The index reveals that 16% - or one in six young people – have found unemployment as stressful as family breakdown, while 12% say they have suffered from nightmares as a result of their joblessness.
The findings are based on the responses of more than 2,000 unemployed 16 to 25-year-old NEETs (an acronym for those 'Not in Education, Employment or Training').
The survey, funded by the Macquarie Group Foundation and carried out by YouGov, looked at a range of areas, from family life, to physical and emotional health.
More than a third of young unemployed (37%) said they lacked a sense of identity, a figure which rose to nearly half (47%) among those who had been out of work for a year or longer.
Almost two thirds of young people in work (63%) said they found their job to be an important part of their identity.
More than a third of unemployed young people (34%) said that being unemployed made them feel isolated all or most of the time, while more than one in four NEETs (27%) admitted that they had sometimes gone longer than a week before leaving their house.
Half of young unemployed people said they felt ashamed to visit a job centre, while just over half of them (55%) said they felt job hunting had left them feeling disillusioned. Fifty-four per cent said the search for a job had made them feel desperate.
Martina Milburn, chief executive the Prince's Trust, said Christmas could be a difficult time of year for young unemployed people, when they might feel alone and isolated.
She said: "Unemployment presents a very real and frightening mental health problem for young people – and the longer they are out of work, the greater the risk. The Prince's Trust can help vulnerable young people back on their feet and into work, building motivation and self-esteem."