Amazon’s raise of full and part-time minimum wage to $15/hour is ALMOST good news. But businesses and policymakers on both sides of the aisle don’t fully understand how work subsidy programs like Medicaid, childcare assistance, food stamps, and cash assistance are prematurely cut before people earn enough to replace them.
I founded Circles USA in the mid 90’s to support families out of poverty. In 2014, I asked the Circles growing network of over 70 communities across 20 states, “What’s the biggest barrier to getting out of poverty?” The answer, unequivocally, was the Cliff Effect. When working families lose public support benefits faster than they can earn income to replace the lost resources, it feels like falling off a cliff.
For example, Circles supported a single Dad with three children in childcare. He got promoted at work with a $3/hour wage increase. The raise was just enough to reach the next category of eligibility for childcare assistance and to lose all of it. The net difference was a loss of $500/month! He did exactly what we hope everyone does—get a good job and increase earned income—but he suffered immediate consequences. This particular story had a happy ending: his employer was outraged by the system and so gave the additional $500/month needed to permanently let go of governmental childcare assistance. But don’t count on that being a universal response.
Subsidy programs are necessary to support people unable to earn a livable wage. The federal and state agencies must pro-rate the exit ramps so people can safely leave these programs. If one earns an extra dollar per hour, then give them a dollar less in subsidies, not four of five dollars less. The Cliff Effect creates a massive phantom workforce in which millions of people who want to work, could work, and should work, cannot afford to take the new job, accept the raise, or increase their hours.
There are no online calculators to help people understand the full impact of the Cliff Effect, so Circles USA and a team at Mass Mutual are collaborating to build a new tool. We are also working with foundations in Michigan and New Mexico to provide state policy makers with research on efforts to mitigate the Cliff Effect. Our goal is to provide states across the country and federal policy makers with resources that will estimate all the cost savings for eliminating the Cliff Effect. You can view our latest reports at CirclesUSA.org.
Raising the minimum wage to $15 an hour is a positive step to help hard-working Americans earn enough money for the basic needs of life. The other half of the solution is to eliminate the Cliff Effect that will unleash an enormous untapped workforce and save billions of dollars in taxes used for subsidies. Otherwise, positive increases in wages might be just enough income to put people in harm’s way.