This article was originally posted on August 29, 2016 by the Foundation for Economic Education (FEE).

Getting a raise from $15 to $18 could cost you over $20,000 in net income. Would you work hard for that promotion?

Pretend you are a poor, single parent of two in Chicago, earning $12 an hour, working full time, and determined to do what is best for your family. And suppose your employer, impressed with your work, offers you training for and promotion to a new job paying $15. Should you take the offer?

It sounds like a no-brainer, but it’s not.

At your present $12 an hour you are eligible for refundable tax credits, food assistance, housing assistance, child care assistance, and medical assistance worth $41,465 combined. Together with your earned income after taxes of $22,121, you are now bringing home to your kids about $63,586 a year.

If you take your employer’s offer, you’ll earn $5,451 more after taxes, $27,572. You will also become eligible for an Affordable Care Act (ACA) premium tax credit. But at that level of earned income all your other benefits would decrease by $8,336, more than your increase in net pay. That means the income you would bring home would decrease from $63,586 to $60,701.

Now, would you take your employer’s offer? What would be best for you and your family, a move up the job ladder with a loss of $2885 in income? Or staying in your same job and keeping the larger income?

The Low-Wage Trap

This example, which is taken from a fascinating, and appalling study by the Illinois Policy Instituteentitled “Modeling Potential Income and Welfare Assistance Benefits in Illinois,” illustrates with clear charts and tables what is known as “welfare cliffs” or the “low wage trap,” which can trap families in poverty. When earning more means taking home less, the disincentive to work is obvious. The report provides striking visual representations of the “welfare cliffs” that poor people’s total incomes can fall off as they increase their earned incomes. Here is the chart on which the hypothetical above is based (the particular numbers in our example come from tables in the report, which clarify the visual data in the charts.)

Notice that welfare cliff we considered above, which occurs between $12 an hour and $15 an hour, is relatively small. A bigger one (and the reason I call the report “appalling”) occurs between $15 an hour and $18 an hour.

An Unaffordable Raise?

To pick up our thought experiment, let’s suppose that you want to get free of welfare eventually, and you know that moving up the job ladder is key to doing so, so you take your employer’s offer of a raise to $15 an hour and the corresponding loss of $2,885 in annual income. You cut back on spending where you can and look to the future. Now suppose further that you do well in your new job, you boost your knowledge and skills, and your employer offers you another promotion, with still more training and a raise to $18 an hour. Should you take it? Can you afford to take it?

At $18 an hour full time you would earn gross income of $37,440, and net income (after taxes) of $33,023. But earned income that high would reduce your refundable tax credit and ACA premium assistance, and eliminate your cash assistance, food assistance, housing assistance, and child care assistance, for a total reduction in government benefits of $26,820. So if you take the promotion and raise, your income would decrease from $60,701 to $39,332! A case could be made that it is irresponsible for you to reduce your family’s income that way.

Just think what that kind of welfare cliff does to the incentive to work (“on the books,” at least) and thereby to get off welfare. And the problem is not restricted to Chicago; the same kind of problem exists all across the country.

One of the tragedies of America today is that so many adults of sound mind and body do not support themselves and their families. It’s a tragedy not because they suffer material want; indeed, relatively few suffer so, because government assistance satisfies many of their material needs. It’s tragic because one of the keys to human happiness is earned self-respect, which requires, as Charles Murray has written, making one’s own way in the world. The vast majority of poor people don’t want welfare; they don’t want handouts; they want a good job with which they can support themselves and their families comfortably. The tragedy of the American welfare system is that it traps so many people in dependency on government, by hindering them from getting on and climbing up the job ladder, and thereby earning self-respect and happiness.

Welfare cliffs are of course not the only reason so many capable Americans languish in partial dependency on government assistance. Dreadful government schools in poor areas and systematic obstacles to getting a job, such as minimum wage laws and occupational licensing laws, are also to blame. But the perverse incentives of America’s welfare system really hurt.

This year has seen some of the most generous unemployment benefit checks since the Great Recession in 2007-2009—and with good reason. As the economic fallout from the COVID-19 pandemic has put 20 million Americans out of work, and over half-a-million right here in Georgia, the need for robust help is pressing. 

Currently, the maximum weekly unemployment benefit available in Georgia is $665, a combination of $365 in state compensation and $300 in federal dollars (due to a recent executive order from President Trump). Earlier this year, the total package was even more generous at $965 due to $600 in federal unemployment checks (a benefit amount that expired on July 31).

This means that an unemployed individual could qualify for the equivalent of a $16.63 per-hour job right now. Not every worker will qualify for this maximum amount because unemployment insurance payments are based on recent earnings over a 52-week period. According to U.S. Department of Labor data, Georgia’s average unemployment is closer to $225 a week, for a combined value of $525 per week when mixed with federal dollars.

What’s more, the federal $300 per-week payments are only guaranteed for three weeks, although it is likely unemployed individuals will receive them for a longer period of time. Also, workers who are receiving less than $100 per week in state unemployment payments are ineligible for the $300 federal payments, meaning that many low-income, part-time, or seasonal workers will likely not qualify.

Do higher unemployment payments have unintended impacts?

These more generous unemployment payments raise an important question: Are there unintended consequences? The answer is clearly yes.

As scholars with the American Enterprise Institute have documented, generous unemployment checks contribute to both delays in workers re-entering the economy and ultimately the economic rebound itself. Workers are not to blame—if your only job options pay less than unemployment compensation, it makes sense to delay joining the workforce again. In many situations, this is the case: One analysis from the University of Chicago concluded that two-thirds of workers eligible for unemployment benefits would receive a benefit amount that exceeds their previous pay.

These unintended impacts are another example of a welfare cliff, the idea that welfare programs often punish efforts to work—due to dramatic drops or “cliffs” in benefits as a recipient’s income increases, even by just cents per hour. For more information on welfare cliffs, visit WelfareCliff.org.

Georgia employers are feeling the crunch

If our goal with unemployment insurance is to serve as a bridge for workers during hard times to propel them back into employment, then our current response is not working properly.

Buffalo Rock Pepsi in Columbus, Georgia, shared with the Georgia Center for Opportunity team that it has had a challenging time this year filling positions for warehouse workers and warehouse coordinators. The resulting shortage of workers has put a strain on existing staff.

Ankerpak—a third-party packaging, fulfillment, and storage facility also based in Columbus—is experiencing similar roadblocks. The company has struggled to fill assembly line positions, and it identifies the high value of unemployment benefits as a primary reason. “Due to challenges presented by lack of staffing, we are nearly 20 people short on a regular basis. We are unable to meet our customers’ demands and/or deadlines, putting us at risk of losing business during these trying times,” the Ankerpak team shared with us.

A way forward

We are not advocating against unemployment insurance or proposing cuts, but it’s clear the existing system has unintended negative impacts. Ultimately, the right question to ask is this: What is the purpose of a public service like unemployment insurance? If it is to truly be a safety net, we must address the problem of when a safety net becomes a snare to keep hard-hit populations trapped in cycles of poverty.

Any true solution to this problem must be local and homegrown. This is where Hiring Well, Doing Good (HWDG) comes in. HWDG connects local job seekers with the training and support needed to not just find a job, but a job that leads to a sustainable wage and a meaningful career. Cooperating on a local level, HWDG brings together individuals, companies, nonprofits, and other service providers to solve unemployment and help people achieve a flourishing life.

Ultimately, the goal of unemployment insurance should be as a bridge to return to the workforce. Local initiatives like HWDG are a catalyst for that return reentry into the labor force in a better job with an upward trajectory.