The Impact of Benefits Cliffs on the Labor Supply
Wednesday, June 1st, 2022
What are Benefits Cliffs?
Benefits cliffs, also known as the 'Cliff Effect', are identified as points in a family or individual's well-being where the option to advance their career actually decreases overall well-being because an increase in wage does not account for a loss of monetary benefits from social programs which they qualified for prior to the wage increase.
Why It Matters
Benefits Cliffs are a workplace phenomenon that has been found to be detrimental to the development of a sustainable and equitable workforce. Benefits Cliffs contribute substatially to the poverty cycle in Georgia, as they act as a barrier to economic mobility by disincentivizing workers from taking nominally higher paying positions that may advance their careers. This dynamic then presents itself as an anchor to, rather than a tool to grow from, social programs and low-income positions, and ultimately enhancing barriers that prevent professional advancement in one's respective industry.
The Research
Benefits Cliffs are a concern for working adults earning between $13 and $17 an hour, which is approximately 28% of Georgia's population. Social programs that are most widely used, including SNAP, childcare subsidies, and the Earned-Income Tax Credit (EITC) calculate eligibility based on several factors which makes it difficult to identify when a Benefits Cliff may occur, exacerbating families' income shortages. Any adult may be at risk of experiencing a Benefits Cliff, but adults with children are at an even higher risk. Additionally, this phenomenon disproportionately impacts Georgia's rural populations where median income is lower.
Many consider Benefits Cliffs to act as an effective tax rate, which lessens the positive impact of earning additional income. Effective tax rates due to Benefits Cliffs can peak as high as 51% in households with children. Oftentimes, the 'Cliff Effect' reduces families' resource capacity unexpectedly and below livable means. Additionally, Benefits Cliffs may serve as a deterrent for those seeking to enter the labor force; a cliff may be so steep that individuals are monetarily better off refraining from working at all.
Why It Matters to Your Business
Benefits Cliffs that disincentivize workers from advancing their career or joining the workforce negatively impact the supply of labor and exacerbate the war for talent. In the face of the labor shortage, attracting and retaining talent has become crucial to a business' ability to function. Businesses should be aware of such challenges that their employees face to successfully retain their workforce and to sustain long-term business stability.
What Georgia Can Do
Benefits Cliffs that disincentivize workers from advancing their career or joining the workforce negatively impact the supply of labor and exacerbate the war for talent. In the face of the labor shortage, attracting and retaining talent has become crucial to a business' ability to function. Businesses should be aware of such challenges that their employees face to successfully retain their workforce and to sustain long-term business stability.
What Georgia Can Do
- Explore innovative ways in which working Georgians can have greater access to long-term career counseling tools and resources in attempts to mitigate the effect of Benefits Cliffs and to smooth individuals' income.
- Use tools such as the Fed CLIFF Tool to predict the impact on your workforce.
- Analyze your business' benefit offerings which may highlight additional coverage or non-monetary benefits that may positively impact your workplace talent.
The Big Picture
By analyzing the ways in which we compensate workers, ensuring that the workforce has the proper tools to career plan in the long term, and by bringing awareness to the issue of Benefits Cliffs we can help Georgians plan for, and curtail the effects of, Benefits Cliffs.
