When Working Costs too Much

Last week, Emily gave an overview of What’s Impacting the Labor Force Participation Rate. This week I’m going to take a deeper dive into one of the areas she touched on; the benefits cliff.

When analyzing the labor participation rate, you have to look at the poverty rate and public assistance participation rate. 

The current poverty rate in Alabama is 14.9%, which’s places us #7 in the nation for highest poverty rate. Given the high poverty rate, it’s important to look at the living wage and average wage rates paid. A living wage varies based on circumstances. For example, a living wage for one person with no partner and no children is going to be lower than it is for someone with a partner and children. Is your organization paying a living wage? 

Alabama ranks among the worst when it comes to the percentage of residents receiving public assistance. Approximately 15% of Alabama residents receive SNAP benefits and 20% receive Medicaid or CHIP. 

So what does this mean for the labor participation rate?

To enter the workforce and to advance in the workforce, many employees have to consider the impact wages and pay raises will have on their overall finances, and if there will be a negative impact. The chart below is an example of what the benefits cliff really looks like. (Data based on a Tennessee workforce study 2022)

The termination of each benefit creates a “cliff” for the employee at which an increase in wages creates a decrease in total income due to the loss of assistance dollars. Therefore, it may be more financially beneficial for the employee to terminate employment and find a lower paying job in order to keep their state benefits or to exit the workforce altogether. 

In recent years, I’ve had multiple clients come to me for advice because they had employees who asked not to receive their pay raise because doing so would mean they lose their state benefits, and losing those benefits would mean that they actually have less income coming in. Some states are moving, or considering moving, to a gradual reduction in benefits versus an immediate loss. 

What can employers do to positively impact the labor participation rate for those who are impacted by poverty and the benefits cliff?

1. Analyze your wages, looking not only at market data, but also the living wage for your region. Then keep your compensation plan up to date, adjusting regularly for cost of living.
2. Consider what resources you can provide that may not be wages, but may mean more money in the employee’s pocket. This could include things such as childcare assistance, flexible spending or dependent care plans, or even establishing a food pantry.
3. Understand how state assistance benefits work, what the income cutoff for each benefit is, and how this may impact employees.
4. Develop training programs to support employees increasing their skills to advance to higher level positions that would increase their income beyond the need for assistance.

What steps has your organization taken to address the benefits cliff?