A Tight Labor Market Could Quell Poverty, but Eligibility Rules Threaten Those Gains

The United States is enjoying a remarkable and durable period of tight labor markets. Currently at 3.6 percent, the unemployment rate has been below 4 percent for 18 months. Employers added 209,000 new jobs to the labor market last month, marking the 30th straight month of job growth. The economy is generating opportunity for many workers, including people who have long been on the margins of the work world.

More than one million additional people with disabilities found jobs between 2021 to 2022; joblessness among people without a high school diploma has been well-below its historical average for 17 months; and although returning citizens remain disadvantaged as job seekers,   employers are more open to hiring people with criminal records than they have been for some time.   In response to plummeting unemployment, employers such as Target have raised starting wages to $15 per hour or higher, or now offer health care benefits, paid time off, and stable scheduling, to woo employees to open positions at lower rungs of the earnings ladder.  Even McDonald’s, once the home of the dead-end “McJob,” has leveled up its offerings with college tuition reimbursement programs and other career pathways support for entry-level crew members.

Though a tight labor market should make it easy for low-income workers to save enough to leave government welfare programs, our research indicates families still rely on government benefits to bridge gaps between costs and earnings. These costs include rising rent and medical care, leaving people to make heartbreaking choices to avoid losing benefits. This hamster wheel keeps people in poverty: entry-level workers earn enough to start saving, but if they earn too much, they lose the government support that can turn those savings into a more long-term asset.

If we want this tight labor market to pull the maximum number of people out of poverty, our social policies need to reinforce the effort low wage workers are making to be more self-sufficient.    Rather than cut them off once they hit a certain dollar amount, we ought to help workers turn those short-term gains into a more durable cushion through programs that, for example, give people a grace period to save more before cutting them off benefits. And, perhaps counterintuitively, a more generous social safety net could ultimately save public dollars over the long run, by allowing workers to exit the poverty hamster wheel for good.

Government benefits that are supposed to bolster income include the Supplemental Nutrition Assistance Program (SNAP, i.e. food stamps), Medicaid and Affordable Care Act subsidies, childcare subsidies, the Earned Income Tax Credit, and subsidized housing such as Section 8 rental vouchers and project-based housing. These programs, many of which are combined federal-state partnerships, entail income and asset limits, which create trade-offs. Parents are forced into impossible choices between near-term stability and longer-term upward mobility when they have their working adult children living with them. Their children’s income pushes the family above the limits of social programs, and so, if the children don’t move out on their own, a near impossibility in many expensive housing markets, the whole family loses benefits.

The result keeps each adult in poverty instead of allowing the family to build more savings, take on more complex jobs and grow wages. These are what policy experts call “cliff effects.” As family income rises, households eclipse the threshold for benefits. But they are not earning enough to make do without the benefits they lose. For example, a worker with two children earning $14 an hour earns roughly $2,240 a month (assuming a 40-hour work week) and is eligible for food stamps (so long as they have less than $2,750 in assets). Should their monthly income exceed $2,495 – a $1.59/hour pay boost, translating into $255 in additional monthly earnings – that family’s eligibility will phase out, resulting in up to a $740 loss in food support.  Tight labor markets accelerate wage growth of this kind, but cliff effects ensure they lose far more in benefits than they gain in wages.        

Now is the right time to reform phase-outs. If the federal government raised the assets cut-off for food stamps above $2,495 and offered a year-long grace period once a family climbed above that limit, low-income families could undo long-term financial dependence and capitalize on the promise of upward mobility and economic security that a historic, robust labor market makes possible. This was the inspiration underlying the ASSET Act, introduced into the Senate in 2020 and 2021, but ultimately not passed. The act would eliminate asset limits for TANF (Temporary Assistance for Needy Families), SNAP and LIHEAP (Low Income Home Energy Assistance Program) and allow individuals to establish savings without pushing them above the threshold for benefit eligibility. But the ASSET Act maintained income limits, which meant these vital benefits would remain out of reach for families that saw wage gains from tight labor markets. 

Evidence shows that loosening up stringent income eligibility limits for economically vulnerable families can underwrite long-term, multigenerational economic mobility. For instance, the Jobs Plus pilot allowed working public housing residents to continue to live in subsidized housing even after their earnings pushed them over the standard income threshold. The program led to lifetime earnings gains for not only the adults in the program, but also the children of those adults. Jobs Plus cost between $5,000 and $8,000 per family for the five-year duration of the program and resulted in between $19,000 and $79,000 in additional lifetime earnings for the children of recipients. Even if we assume the program costs were at the high end of the range and the benefits were at the lowest end of the range, the simplest cost-benefit analysis suggests a winning bet for policy.

Our current system of asset/income testing perpetuates intergenerational poverty, by making it more difficult for working families to save in order to escape the hamster wheel. We need to back away from our obsession with “free riders” and our assumption that people who are helped by these programs do not seek independence from them. They want that freedom as much as any middle-class worker. We should rethink these cut-off points and recognize the value of a “springboard to mobility.” That’s what the country’s low-wage workers want. That’s what we all should want for them. 

This is an opinion and analysis article, and the views expressed by the author or authors are not necessarily those of Scientific American.

ABOUT THE AUTHOR(S)

Katherine S. Newman is the provost of the University of California system and the Chancellor’s Distinguished Professor of Sociology and Public Policy at U.C. Berkeley. She and Elisabeth S. Jacobs are co-authors of Moving the Needle: What Tight Labor Markets Do for the Poor.

Elisabeth S. Jacobs is a senior fellow at the Center on Labor, Human Services and Population and deputy director of WorkRise at the Urban Institute. She and Katherine S. Newman are co-authors of Moving the Needle: What Tight Labor Markets Do for the Poor.

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