How Understanding Benefits Cliffs Can Help Employers Attract and Retain Talent
Despite concerns of a slowing economy, the labor market continues to be relatively tight. At less than 4%, the unemployment rate remains near a historic low.1 Collectively, in December of 2022 US employers had 11 million job openings, an unprecedented figure prior to the pandemic.2
Many employers have responded to tight labor market by boosting wages. According to the Atlanta Fed’s Wage Growth Tracker, for example, year-over-year hourly wage growth in December 2022 topped 6%.3 Prior to 2022, annual wage growth hadn’t exceeded 6% in at least 25 years. In addition, unlike 25 years ago when the greatest gains were among people holding bachelor’s degrees, the gains in December 2022 were greatest for people without a bachelor’s degree.4
On the surface, rising wages would seemingly provide an absolute incentive for individuals to enter the workforce or take on additional hours. However, for some, these wage gains may ultimately produce negligible increases, or even effective losses, in available household resources due to the structure of public benefits eligibility and the resulting financial disincentives. These “benefits cliffs” occur when income increases associated with career advancement puts a family above the income eligibility threshold for public benefits and the family is effectively financially worse off than before the wage increase. In other instances, a wage increase may result in no increase in family resources, a phenomenon known as a “benefits plateau.”
Against this backdrop, how can employers enhance their ability to retain and recruit talent without unintentionally creating cliff effects for these same individuals? The complexity of social assistance programs can make it impractical for companies to model the interaction of public benefits, tax burdens, and wages. The development of the Federal Reserve Bank of Atlanta’s Career Ladder and Financial Forecaster (CLIFF) Employer Dashboard, however, provides an effective tool for examining how an increase in wages or hours worked may change a worker’s available net financial resources.
Take the hypothetical example of a retailer in Miami-Dade County, Florida, trying to encourage a part-time supervisor to take on additional hours. The worker is married with two kids (ages 5 and 10); their partner works full-time and makes $14 an hour, the median wage for retail workers in the region. The family receives public benefits from five programs—the Child Care and Development Fund’ (CCDF), Medicaid for Adults, Children’s Health Insurance Program (CHIP), the Child Tax Credit (CTC), and the Earned Income Tax Credit (EITC). The employee currently works 24 hours a week as a supervisor and earns $19 an hour, the average for this occupation regionally.
The retailer offers the employee a $1 an hour raise if they will commit to working 32 hours a week. The raise and increase in hours worked would generate an annual increase in after-tax take-home pay of more than $9,500. The rise in take-home pay, however, would be offset by the loss of nearly $4,500 in public benefits and an increase in living expenses of nearly $2,700. All told, the family’s available net financial resources—what’s available after paying for basic expenses such as childcare, food, employer-sponsored health insurance, housing, transportation, utilities, and taxes—would increase by just $45 a month.
Faced with such a limited return on investment in additional hours worked, it may be unsurprising if the worker turns down both the raise and additional hours. The CLIFF Employer Dashboard, however, allows the retailer to model potential alternatives to help craft a more compelling compensation package and enhance the company’s investment in their workers. Specific fringe benefits such as a transit pass or health care coverage may qualify for special tax treatment, thus helping employers craft innovative offerings that increase a worker’s net financial resources while not triggering a benefit cliff. Even if it is not feasible to develop a more compelling compensation offering, the Employer Dashboard and other CLIFF tools may assist employers in identifying career and income advancement opportunities that provide a long-term pathway to increased financial resources.
Ultimately, the CLIFF Dashboard Employer Edition can help employers explore how best to leverage various compensation packages and career trajectories to effectively bolster worker net financial resources. Employers can thus improve the financial well-being of their workers while also improving their ability to recruit talent in today’s labor crunch.
For additional information on the CLIFF Dashboard Employer Edition or other benefits cliffs tools developed by the Atlanta Fed, please contact John Rees at firstname.lastname@example.org.
By John Rees, CED senior adviser. The views express here are the author’s and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author’s responsibility.
1 Bureau of Labor Statistics, Local Area Unemployment Statistics.
2 Bureau of Labor Statistics, Job Openings and Labor Turnover Survey (total nonfarm, seasonally adjusted).
3 Federal Reserve Bank of Atlanta, Wage Growth Tracker. 12-month moving averages (unweighted, hourly).
4 Federal Reserve Bank of Atlanta, Wage Growth Tracker. 12-month moving averages (unweighted, hourly).
During the past 12 months, wages for workers without a four-year degree have increased at a faster pace than for college graduates and wage gains among workers with wages in the bottom quartile have outpaced those among workers in the top quarter.