The Path from Poverty to Prosperity Can be a Roller Coaster: An Examination of Hourly Wages, Expenses, and Monthly

The Path from Poverty to Prosperity Can be a Roller Coaster:An Examination of Hourly Wages, Expenses, and Monthly

Emily CampbellAssociate Director and Williamson Family Fellow for Applied Research

July, 2016

For most families, a pay increase is cause for celebration. A raise means more money in their pockets at the end of the month. The extra could be used to fund a family vacation, pay down debt, or provide cushion in the monthly budget. However, for some families earning low wages, a raise means they will have less money in their pockets at the end of the month. In some circumstances, even a small increase in income causes a drop in the public benefits a family can receive, effectively increasing their expenses and hurting their ability to make ends meet.This phenomenon is often called the “benefit cliff.” Eligibility for public benefits, such as child care subsidies, housing vouchers, and food assistance, is based on income. These benefits phase out or drop off as income increases. As families earn more, they qualify for less. The intent of such “means tested” benefits is to ensure that scarce resources are used for those most in need. Most of the time, they function as intended and provide important support to help families make ends meet. However, there are instances when even a $1.00 increase in annual earnings results in the loss of a benefit worth hundreds of dollars to a family. As explained by Indiana Institute on Working Families: “Most often the single greatest barrier to self‐sufficiency for low income individuals is the ‘cliff effect’… The unintended consequence of this design either leads to a disincentive towards economic mobility, or leads to a situation in which the parent or guardian is working harder, but is financially worse off.”