Heterogeneous Effects of Health Shocks in Developed Countries: Evidence from Australia

Idiosyncratic shocks, such as health shocks, have been shown to have significant effects of income, consumption smoothing and asset accumulation in developing countries. However, less is known about how health shocks impact on individuals’ and households’ consumption and saving behaviour in developed countries. In this paper we examine how health shocks impact on households’ decision to save, and how different socio-economic and ethnic groups respond to health shocks in Australia. We find that health shocks are associated with a substantial reduction in individual savings, but not in household net worth. We do not find any substitution of labour supply by a partner in response to an individual’s health shocks. We also find evidence that negative health shocks are associated with an increase in receipts of public transfers and benefits in the following years. There is some evidence that the fall in savings is greater for low-income individuals, even if they are insured by the public health system and unemployment benefits. Migrants experience a larger decline in savings compared to Australian-born individuals. Surprisingly, savings of individuals who have private health insurance are more affected by health shocks, compared to individuals who do not have private health insurance, suggesting a role for selection into private health insurance.