Falling Off a Cliff: When Workers Can’t Afford to Take a Job

Pick up the business section of any paper, and you’re bound to read an article about employers struggling to fill their open positions. We are swamped with messaging about the skills gap and the failures of workforce development systems and training programs. We also hear about the need to “get people off the bench,” meaning those who are able to work, but aren’t.

While there is plenty of room for improvement in how training and education services are provided, and while it’s true that the skills required to get a good job are changing rapidly, there are many other factors preventing employers from filling their open positions.

With the unemployment rate below 4 percent, we are in a “full employment” economy, and job seekers have lots of choices. But not all choices are equal. Many of the available jobs tend to be lower-wage positions; some of them part-time with no benefits and with unpredictable schedules.

In some cases, people literally can’t afford to take those jobs.

How can that be?

For people who access public benefits such as SNAP, Medicaid, and child care or housing vouchers, a key consideration when accepting a job, working more hours, or taking pay raise, is “What will this mean for my benefits?” It’s known as “the cliff effect,” and it’s what happens when a person experiences a relatively small increase in income, only to lose some of the critical public benefits they were receiving. The value of the benefits lost can sometimes exceed the gain in income, and dropping them off a “cliff” in terms of the net resources they bring home. In other words, a new job or raise can actually make them worse off.

Here’s an example. In northern Kentucky, if a person gets a pay increase from $13 to $15 an hour, that equates to a $4,000 annual increase.[1] At that income level, they lose their housing and child care public assistance. The value of these benefits is about $15,000. Ouch!

What does a job seeker do when confronted with this choice? They do what we all do and choose what is best for their families, and often that means turning down the raise. Just about every employer I have talked to has seen this happen.

The Kentucky example above is typical. In Ohio, the cliff effect for a family of three (a single parent and two children) starts when a person’s annual income is about $25,000. They progressively lose more benefits as their income increases to about $35,000. In hourly terms, which is how most low-wage workers are paid, the two poles of this income range equate to about $12.50 to $17 an hour.

At this point, you might be thinking, “Wait, you’re saying that people working full time for $15 an hour still receive public benefits?” That is exactly what I am saying. Here’s why:

Most lower-skill, entry-level positions pay $12-15 an hour. A family of three needs about $20 just to be able to afford the basics of food, clothing, rent, utilities. A family of four needs $24 (or $50,000 per year) for just the basics. That’s why they need public benefits if they are only earning $15.

“Okay, but people just need to work harder and get a better job, right?”

Let’s look at that. How many jobs in the greater Cincinnati region pay over $50,000? Only one in four. Said another way, three out of four jobs pay less than household-sustaining wages per year. And even at that wage, there is no money left to handle a car breakdown, or a medical emergency, or to save for the future.

So while it seems to make sense to remove public benefits as a person earns more, the current way that income levels are tied to benefits creates a disincentive to work or to pick up more hours. And even though that person is working hard, doing all they can to make ends meet, they can never get ahead because the jobs available to them, even with more training and skills, pay less than what it costs to provide for their families.

At some point, there are no public benefits available to assist them. And they are one medical emergency or car breakdown away from falling back into poverty.

If this sounds absurd, that is because it is, and yet it’s the current policy across the country. A number of states have been studying this issue and introducing legislation to fix it, with Colorado leading the charge. Unfortunately, in many cases, the proposed legislation just died – for a variety of reasons, but mostly due to lack of funding.

Until policies change, what can employers do, especially if they can’t raise wages? Well, they can talk to their employees and find out what would help them the most. Solutions might be providing assistance with transportation expenses, such as providing bus passes or a shuttle. It might be more predictable schedules that would even out their incomes week-to-week or month-to-month. It could be small emergency loans to cover a car breakdown. All of these options, and more, are provided in the National Fund’s Job Design Framework and in an employer’s toolkit compiled by the Women’s Fund of the Greater Cincinnati Foundation.

Employers can also talk to their legislators. They can explain to them how crazy it is to disincentivize people to work or accept a raise. We need reforms that will help people move off of public benefits in a more rational way that supports them as they are working hard and trying to get ahead. At the same time, employers should be doing all they can to think about how they can make their jobs even better (see the Job Design Framework). And yes, pay more.

[1] Wage data is from the Women’s Fund of the Greater Cincinnati Foundation’s Pulse Report: Outlining the Disincentives and Opportunity Costs for Working Mothers.

Janice Urbanik

-- Senior Director for Innovation and Strategy, National Fund for Workforce Solutions