Wage cliff makes higher income a problem for some workers


A recent study by researchers at the University of Cincinnati Economics Center highlighted what it called a hidden trap for many low income workers in Clark County looking to earn higher wages and escape poverty.

For some workers, earning higher wages can result in what the researchers called the cliff effect. Even a slight bump in wages can cost families thousands of dollars in public assistance in some cases as workers try to improve their financial situation. In those cases, earning more money actually works against a family’s financial interests, said Horton Hobbs, vice president of economic development for the Chamber of Greater Springfield.

Hobbs wasn’t surprised that the study showed a wage cliff exists, but said he didn’t expect that even a tiny wage increase could force some families into tough financial decisions depending on their situation.

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“I didn’t really see the effects that literally one dollar more per year, not per hour, could have on a family,” Hobbs said. “The way some public assistance programs are structured may not create an incentive to work. The economic impact on one’s budget is detrimentally affected just because they’re earning more through a job.”

The Chamber and the Community Improvement Corp. of Clark County commissioned the study.

It’s not clear exactly how many families are facing those kinds of choices, but information from the study showed 16 percent of the 54,681 households in Clark County are at or below the 2016 federal poverty level of about $24,300 for a family of four.

In all, 26 percent of households did not meet a self-sufficiency standard considered necessary to cover a family’s basic needs like food, child care, housing and transportation. The UC study used a standard of $48,745 for a two adult household with one preschool child and one school-aged child as one example of a family in Clark County. That standard also doesn’t take into account any debt a family faces, including credit car payments or student loans for example.

In Champaign County, information from the United Way of Clark, Champaign and Madison Counties showed in 2015, 11 percent of households were considered at or below the federal poverty level. Another 25 percent of households earned more than the federal poverty level but less than the amount needed to be considered to meet the basic cost of living for the county.

The UC study showed in extreme cases, earning even $1 extra per year could cost a two-adult, two-child family more than $4,200 in public assistance. In that case the cliff occurs as the adults in the family transition off of Medicaid and into the Affordable Care Act for medical benefits.

In order to offset the impact of the cliff effect, the UC study pointed out the same family would have to increase their household income by an additional $8,466 from its starting point of $33,534 to about $42,000 in order to achieve the same level of total gross resources as before the cliff effect occured.

Clark County has seen companies like Speedway and manufacturers like Topre America Corp. pledge hundreds of new jobs over the next few years. But local economic development officials and social services experts said the data shows a need to work with local employers and lawmakers to look for creative ways to incentivize work as families look to improve their financial status.

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“This is a huge deal for our community,” said Kerry Pedraza, executive director of the United Way of Clark, Champaign and Madison Counties. “We’re on the upswing and we’re doing all the right things. This is a landmine that we need to look at. It’s not the pretty part of our story right now but it is an important part.”

Ohio has made strides to address the wage cliff in recent years, including approving legislation in 2016 that allowed families to remain enrolled in the state’s public childcare program until reaching 300 percent of the federal poverty level, said Wendy Patton, senior project director at Policy Matters Ohio, a left-leaning think tank that focuses on economic issues.

She argued the idea of the wage cliff is a less important compared to the concern that many of the public assistance programs available to families in Ohio are underfunded, so even many of those eligible for assistance for items like affordable housing aren’t getting the help they need.

“The cliff is looking at the trees,” Patton said. “The forest is that there aren’t enough resources to provide people with the help they need.”

Clark County’s involvement

The project was led by the Community Improvement Corp. of Clark County and Chamber and funded through a contract with the Ohio Department of Job and Family Services. Local officials sought information on the cliff effect after talking to local employers and agencies that provide assistance to families, Hobbs said. Researchers at the University of Cincinnati Economics center had conducted similar research in Hamilton County.

“We wanted to see what that cliff effect looked like in Clark County,” Hobbs said. “We wanted to see where that band was with certain individuals.”

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The issue impacts not only families, but local businesses who are trying to hire workers for available jobs during a period of low unemployment, Hobbs said. If boosting earnings or taking on more debt to improve training doesn’t make financial sense for a worker, it also makes it harder for employers to find a qualified work force.

“It’s obviously a very complex issue,” said Clark County Department of Job and Family Services Director Virginia Martycz. “Unfortunately, people face difficult decisions to not move forward with some employment options because they need to care for their family. At the local level, we are committed to working within our constraints with our customers and the business community to assist in that transition to the best of our ability.”

A family’s total gross resources is a key factor to consider, said Nora Vonder Meulen, a research associate at the UC Economics Center who worked on the study.

She pointed to one scenario focused on a hypothetical household with one adult worker, a preschool-aged child and one school-aged child. At $8.30 per hour, the household’s total gross resources would be about $45,356 including both income and public assistance benefits, assuming the household received the all of the benefits they qualified for and received the maximum benefits available.

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If that worker’s hourly pay nearly doubled to $15 an hour, their income would jump from about $16,600 a year to $30,000. But the family’s total gross resources would only increase about $3,000 because the higher earnings would cost the family more than $10,000 in public assistance benefits. The report assumes adults work full-time 50 weeks a year.

“Total gross resources are relatively stagnant until earnings reach approximately $45,000, after which the household’s total gross resources increase rather linearly with annual earnings,” the report states. “Annual earnings of $45,000 equates to the adult earning $22.50 per hour.”

To earn higher wages, families often have to take on additional debt to go to college or get other training to boost job skills as well, she said. Households may not be willing to take on additional debt for training to earn more money if boosting pay won’t necessarily mean additional resources for the family.

Workers also face other challenges, including the idea those receiving food assistance may not be able to take time off their current jobs to seek additional training because the program requires work participation rules to receive and maintain benefits.

“Vulnerability is a big factor when you’re talking about all this,” Vonder Meulen said.

A complex problem

Emily Campbell, associate director of the Center for Community Solutions, said the state has made some improvements to make it easier for families to retain some benefits in its public childcare program, but said the cliff effect remains a concern statewide. The center is a non-partisan, non-profit think tank with offices in Cleveland and Columbus.

One program with some of the biggest cliffs is Medicaid, Campbell said. The state’s decision to expand the program to accept households at or below 138 percent of the federal poverty level has helped more Ohioans get health insurance she said. But the program also has strict income requirements to qualify.

“That’s because Medicaid is either you have it or you don’t,” Campbell said. “There’s no step-down situation and it has very firm income requirements. If you make even one dollar too much you completely lose the entire benefit. The good economic decision for that family would be to not work more hours or take a raise if you’re looking at a pure economic modeling standpoint.”

She said some potential solutions could involve changes to allow benefits to disappear more gradually as workers earn more money. At the local level, some community groups throughout Ohio have also tried other methods to help families ease off of public benefits by providing short-term grants or providing meals for a couple months as families make the transition off public benefits.

“There are some policy-level things that can be done but there are also some community answers,” Campbell said.

Hobbs said local officials also plan to work with elected officials both at the state and federal level to raise more attention to the issue. He said local employers also need to be involved in the conversation.

“There are potentially ways for various public assistance programs to ensure they incentivize the behaviors we want,” Hobbs said. “The behavior should be to get people back to work to give them a sense of self-worth and productivity,”

Clark County and other parts of the state could face a long-term problem years from now, because many of those workers have little or no savings as they near retirement age.

Part of the challenge is changing the public’s perception of how public benefits work, Pedraza said.

“I get frustrated when I hear people say, ‘They know how to work the system,’” Pedraza said of workers who receive public assistance. “They’re working the system often times just for survival. There are people that have figured out how to live off the system without trying to better themselves but I’d like to think those are the minority. The data that’s shown here suggests it’s not working the system, they’re working to survive.”



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