The Cliff Effect: One Step Forward, Two Steps Back - Policy Design as a Disincentive for Economic Mobility

Derek Thomas

Abstract


The purpose of this report is to illustrate the “cliff effect” —the benefit “cliff” that occurs when even a $0.50 increase in hourly wages among heads of households leads to the complete termination of a benefit, and a dramatic net loss of resources. The unintended consequences of this design acts as a poverty trap – resulting in a disincentive towards economic mobility, or creating a situation in which the parent or guardian is working harder, but is financially worse off. The report is modeled after NCCP’s “Making Work Pay” reports (Columbia University) —also sponsored by the Annie E. Casey Foundation. This report will be the first of its kind to use the Indiana specific Self-Sufficiency Standard.76,77 According to the Standard: “Self Sufficiency is a measure used to determine how much income a family of a particular composition in a given place requires to adequately meet their basic needs, such as housing, food, transportation, health insurance, child care and other necessities—without relying on public or private assistance.”

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