At a time when income inequality and lack of economic mobility are hot topics, a report from the Georgia Center for Opportunity (GCO) sheds light on how our social safety-net system could be contributing to these trends.
Entitled “Workforce Engagement: A Missing Link in Understanding Income Inequality,” the report explores how government support unintentionally discourages low-income workers from escaping poverty. The report also presents actionable policy solutions to avoid that trap.
What Are Safety-Net Benefits?
Safety-net systems include programs like food stamps, housing subsidies, and Medicaid, designed to provide financial assistance to those in need. While these programs are essential, they can inadvertently create barriers to long-term financial independence. This phenomenon is known as the “benefits cliff,” where individuals and families turn down career advancement opportunities to avoid losing government benefits.
The Source of Income Disparities
The GCO report reveals that government benefits often obscure the true income disparities between low-income and middle-income households.
When examining work-capable households, the unearned income from government benefits can paint a misleading picture of economic equality. Without these benefits, it’s clear that households in the lowest income quintile earn significantly less than their counterparts in higher income quintiles.
The report also highlights how these safety-net benefits can create disincentives for the lowest-paid workers to move up the economic ladder. For instance, after adjusting for taxes and transfer payments, the net income of households in the lowest quintile is almost equal to those in the second quintile, despite the latter earning nearly four times more.
This equalization is largely driven by government transfers, which provide significantly more support to the bottom quintile compared to the second quintile. This scenario leads to nearly identical average per capita net incomes between these groups.
