Health shocks and household allocation of time and spending

Abstract

How do household spending and time use respond to health shocks? Secular increases in the incidence of dual earning couples, the aging of the workforce and higher life expectancy make this question particularly relevant for economists and policymakers. We use Australian data from the Household Income and Labour Dynamics Survey to study this question. Using an event study design, we show that the labor supply of those that experience a health shock decreases from their baseline for more than a year. Home production increases for the spouse of the ill person in two dimensions: increased time spent caring for household members and increased time spent on household chores. We also find that households spend more money on household and medical items and less on holidays and alcohol in response to the health shock. Although household income only moderately decreases, the inability to cut total spending results in a higher proportion of individuals reporting financial stress. We discuss our findings in relation to the provision of social insurance in advanced economies.