Discussion Paper

Benefits Cliffs and the Financial Incentives for Career Advancement: A Case Study of the Health Care Services Career Pathway

Abstract: 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.

Keywords: provision and effects of welfare programs; skills; human capital; effective marginal tax rates; benefits cliffs; workforce development;

JEL Classification: I38; J08; J24;

https://doi.org/10.29338/dp2020-01

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Community and Economic Development Discussion Paper

Publication Date: 2020-01-03

Number: 2020-1