Health shocks and household allocation of time and spending

Using the Household Income and Labour Dynamics in Australia data, we study changes in household allocation of time and spending when a family member experiences a health shock. Applying an event study design, we document that health shocks increase household expenditures and time spent in home production activities that are complements for healing and reduce those that are substitutes. Medical expenditures and spousal caregiving time rise; while spending on alcohol, a good that detracts from healing, declines. Labour supply of the ill person decreases at both the intensive and extensive margin. As the ill person’s labour supply declines, we find an increase in consumption of complements for staying at home, such as spending on household utilities and time for housework by the unaffected spouse. Although the fall in earnings is partially offset by worker compensation and social security payments, the inability to cut total spending results in a higher proportion of individuals reporting financial stress.