David Altig
Federal Reserve Bank of Atlanta
Research Department
Elias Ilin
Federal Reserve Bank of Atlanta
Research Department
Boston University
Alexander Ruder
Federal Reserve Bank of Atlanta
Community and Economic Development Department
Ellyn Terry
Federal Reserve Bank of Atlanta
Research Department
University of Washington
Discussion Paper 2020-01
January 2020
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Benefits cliffs, which occur when earnings gains are offset by the loss of public benefits, have long been recognized to create financial disincentives for low-income individuals to earn more income. In this paper, the authors develop a new methodology to study benefits cliffs in the context of career advancement. The authors illustrate the change in net financial resources for an individual pursuing the health care services career pathway from certified nursing assistant (CNA) to licensed practical nurse (LPN) to registered nurse (RN). Accounting for increases in taxes and the loss of public benefits, the authors show that a single mother with two children receiving maximum available public benefits can be financially worse off in the short and medium term when advancing from the entry-level CNA position. Over a lifetime, career advancement leads to large financial gains. The authors also calculate a large lifetime net public savings if the mother advances to the RN position. Finally, the authors illustrate two policy interventions: a childcare subsidy phaseout that is gradual rather than sudden, and an application of transitional public benefits with asset mapping of financial resources. The authors show how each of these interventions benefits a low-income parent seeking to advance up the economic ladder.
JEL classification: I38, J08, J24
Key words: workforce development, benefits cliffs, human capital, skills, provision and effects of welfare programs, effective marginal tax rates
https://doi.org/10.29338/dp2020-01
The authors thank Darryl Koehler, Laurence Kotlikoff, and Michael Leiseca for guidance on the use of The Fiscal Analyzer. We also thank Nick Espinosa, Jeffrey Fredericks, Sandra Giddy, and Carlis Williams for providing extensive details on the Continuum of Services model in Mississippi. Brittany Birken and Dale Brill offered valuable assistance with our analysis of the FATES graduated benefits phaseout program in Florida. Seth Hartig provided excellent feedback on early drafts. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Comments to the author are welcome at alexander.ruder@atl.frb.org and ellyn.terry@atl.frb.org