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Poverty Management Produces The Cliff Effect and a Phantom Workforce

The poverty management system produces a barrier known as the Benefits Cliff Effect that reduces subsidies faster than people can replace them with new earned income. Individuals know by word of mouth that this exists but may not have the knowledge of details to determine which subsidies will be reduced by how much if they take a pay raise, more hours, or a new job. Given this barrier, it is responsible for individuals to estimate whether they can afford to take the next step towards economic self-sufficiency. These estimations are typically wrong and lead individuals to make decisions to avoid more earned income or a new opportunity. People worry about losing their new job, or extra hours and not being able to get assistance again in time to avoid a financial crisis in meeting basic needs. By not pro-rating the exit ramp to these programs, the government creates a financial crisis for people as they earn more income. A more straightforward and timely process for getting back onto assistance would help to mitigate this fear and encourage more people to take new income opportunities.

The Phantom Workforce

Communities that are struggling with fewer economic base jobs--those jobs that bring money into a community and generate on average two local service jobs--must mine their own local talent from the unqualified labor pool. Employers will struggle trying to recruit from a “phantom workforce” that will resist entry and middle skill work opportunities until the cliff effects in benefit programs are eliminated. Cliff effects occur when assistance programs like childcare subsidies and Medicaid remove benefits faster than people can earn enough income to replace them. Due to the lack of ready available benefit calculators and government employees who can easily show people the results of taking new earned income, there will be a level of resistance from perceived changes in benefits, whether these are real and accurate changes.

Circles USA is working closely with the Atlanta Federal Reserve Bank which has built "Cliff Effect Planners Tool" for Circles USA chapters in ten states so far for beta testing. The planning tool gives planners the information they need to understand how increased income will affect their overall spending power as they leave benefit programs. It can also be used to educate policy makers about the disincentives and harm caused by programs that do not have pro-rated exit ramps.

Another group of people in the phantom workforce are those returning to the community from prison. Company policies around higher ex-felons would need to be reconsidered in order employ able and willing job candidates. The recidivism rate increases substantially when employment is not quickly gained after release from prison.

The Cliff Effect and the New On-Demand, 1099 Economy

To resolve poverty requires understanding where the economy is heading and how to support the bottom third of the US earners in having enough income to be economically secure. Companies can make more wealth with fewer people than ever before. They are rapidly shedding US blue-collar jobs through automation, artificial intelligence, and globalization. More of the working poor are being let go from the security of being on a company’s payroll (w2 jobs) and must now take more temporary jobs, presently being described as on-demand or 1099 jobs. While this can be exciting for middle and upper-income people, the working poor and those leaving welfare will need programs like Circles to help them navigate this new environment. The benefits cliff effect further complicates families managing this new work environment because they can lose income more quickly and face crises during the lag time of receiving benefits again.

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