The Impact of the COBRA Premium Subsidy on the Duration of Unemployment: Evidence from the 2009 American Recovery and Reinvestment Act (ARRA)

While there has been a tremendous amount of literature on how Unemployment Insurance (UI) affects unemployed workers’ job search behavior, there has been no previous study on how the health insurance premium subsidy affects this behavior. To fill the gap in previous studies, this paper analyzes the impact of the substantial federal health insurance premium subsidy on unemployment duration, using data from the Survey of Income and Program Participation (SIPP). To begin this study, I detail the history of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 that was established to help keep unemployed workers insured. Furthermore, in order to help unemployed individuals reduce the cost of getting insurance, the American Recovery and Reinvestment Act (ARRA) of 2009 provided a 65% health insurance premium subsidy for workers who lost their jobs involuntarily and elected to take up COBRA coverage. In order to identify the subsidy effect on the duration of unemployment, this paper compares the unemployment duration of two different unemployed cohorts who lost their jobs just before and after the end of subsidy eligibility. This study finds that subsidy-eligible unemployed workers significantly increased unemployment duration conditional on the underlying factors influencing their individual preferences for insurance and UI benefits. The empirical results are consistent with the predictions of job search theory. Moreover, the extended unemployment duration resulting from the premium subsidy is equivalent to the effect of increasing UI benefits by more than 50 percent, which implies that the COBRA premium subsidy is having an important impact on the unemployed workers’ job transition behavior.