Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

A major provision of the American Recovery and Reinvestment Act helps predict what will happen in the insurance market next year.

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Employees and employers often take steps to avoid layoffs, like working hard to encourage customers and clients to continue buying the goods and services provided by the business.

Sometimes layoffs are not avoided by such efforts, which is why many employers also take steps to ease the burden of a layoff on employees and their families and to minimize disputes between them and the employer. Many businesses voluntarily offer cash severance pay, which is intended to replace the usual paycheck for several weeks or months after the layoff, depending on the length of time that the employee had been with the company. (During the time of unemployment, the former employee can many times collect both the severance pay and state unemployment insurance benefits.)

Employers may also offer to help laid-off workers continue with their health insurance during the unemployment spell. (Indeed, a laid-off worker who intended to spend some severance pay on health insurance premiums would save money on taxes if the former employer were paying those premiums, even if it meant lower severance.) Severance pay and health insurance costs for former employees are significant expenses that employers presumably take into account when they decide the number and timing of their layoffs.

During 2009 and 2010, the American Recovery and Reinvestment Act had the federal government pay some costs of layoffs, especially with its premium-assistance program, which paid 65 percent of the premiums that a laid-off employee would pay to stay on the former employer’s health plan. People who could join a spouse’s employer health plan and people without health insurance on their previous job were ineligible for the program.

Economists understand this premium assistance to be a subsidy to layoffs, making them cheaper and less of a burden. Employers saw it this way, too, according to an Urban Institute study.

“Some large‐firm interviewees reported that before A.R.R.A. they provided some amount of free or reduced cost Cobra coverage for laid‐off workers, based upon the prior duration of employment,” the study found, referring to the Consolidated Omnibus Budget Reconciliation Act, which allows workers who have lost their jobs to purchase coverage. ”Several of these companies reported that they reduced or dropped this prior benefit in reaction to A.R.R.A.”

Although we will learn more when (and if) the United States Treasury releases its final report on the premium-assistance program, it appears that program participation was high. An interim report indicated that perhaps two million households and even more individuals had their health insurance subsidized within nine or 10 months of starting the program.

The law’s premium assistance program ended in 2010, but significant amounts of premium assistance are coming next year as a part of the Affordable Care Act. For families with income between 100 and 250 percent of the poverty line, the Affordable Care Act is even more generous than the Recovery Act, because it helps them pay for both health insurance premiums and out-of-pocket costs like co-payments and deductibles. Also, health insurance is more expensive now than it was in 2009, which makes a percentage subsidy that much more valuable.

Moreover, unlike the Recovery Act’s program, next year’s program welcomes people out of work even if they left work by quitting, retiring or being fired for cause. It also welcomes people who have the possibility of joining a spouse’s plan and people who had no health insurance on their prior job.

Thus, we are about to begin a federal program that subsidizes layoffs to a degree that we have not seen before. Nevertheless, economic and budget forecasts by the Congressional Budget Office and others have yet to consider the effects of the layoff subsidy on the size of the program and the number of layoffs that will occur.

The C.B.O. has concluded that 800,000 people will take early retirements or quit as a consequence of the Affordable Care Act, not from its premium assistance, but based on the assumption that the unsubsidized nongroup health insurance market will operate better. The C.B.O. still needs to estimate how many people will be laid off as a consequence of the new subsidy to layoffs.

Over all, the C.B.O. predicts that 11 million people will receive premium assistance in 2015 (and even fewer in 2014), the vast majority of whom would be employed or dependents of an employed person. Yet the Recovery Act’s experience suggests that three million or four million people will receive premium assistance through unemployment alone, not to mention the millions more that receive it while working.

Be prepared for some unpleasant surprises over the next year or two, both as to the amount that the labor market is depressed and the unanticipated federal spending that will be needed to provide the benefits promised by the Affordable Care Act.

Article source: http://economix.blogs.nytimes.com/2013/06/12/the-new-subsidy-for-layoffs/?partner=rss&emc=rss