Workers who rely on public assistance often face a dilemma when they earn a raise or promotion: A slight salary increase could disqualify them from housing, healthcare, or other public benefits that greatly outweigh their additional income.

This is known as the “cliff effect,” and it’s an issue local employers often discuss with Anne Kandilis, who works in economic development and is the initiative director of the Springfield (Massachusetts) Working Cities Challenge team.

“I’ll ask, ‘How many of you have had employees refuse a raise or promotion, or quit, when they were doing so well?’” she said. “Most talk about this exact thing happening, and one of the reasons behind it is this ‘cliff effect.’”

This year, new state legislation – created in part by Kandilis – will put $1 million toward a pilot program focused on helping 100 families across Massachusetts overcome the cliff effect.

“Our goal is really to advance economic mobility,” she said.

Benefits cliffs keep people out of the workforce 

The cliff effect, also known as the benefits cliff, occurs when a small wage increase pushes a household slightly above the maximum income limits of a public benefit they depend on, said Colleen Dawicki, who works in the Regional & Community Outreach group at the Federal Reserve Bank of Boston.

“That can discourage people from taking on new work or getting promoted along a career pathway,” she said. “It's keeping people out of the labor force.”

Prabal Chakrabarti, the Boston Fed’s community affairs officer, called the cliff effect “a real barrier to wealth-building and financial stability for many families across New England.”

“By taking on this issue, the Springfield Working Cities team is helping to strengthen our local economies,” he said.

The Working Cities Challenge – part of the Boston Fed’s Working Places initiative – focuses on promoting economic development in smaller, post-industrial cities. The Springfield Working Cities Challenge team, called Springfield WORKS, started in 2016 and works in partnership with the Western Mass Economic Development Council. Recently, the Atlanta Fed provided technical assistance to the team through its Career Ladder Identified and Financial Forecaster (or CLIFF) tool.

Kandilis and other team members began advocating for a state program to address the cliff effect six years ago, after seeing its local impacts. Springfield has struggled with economic stability, low labor force participation, and high unemployment for years. About one-third of residents receive at least one public benefit, Kandilis said.

“The cliff effect is just one piece of a larger, broken system,” she said. “But it's a real drag on our economy … (and) it's a real disservice to the people who live here.”

Program will use financial aid and career mentoring to support families

The three-year pilot program, which uses funding from the American Rescue Plan Act, combines financial aid with job training and mentoring to help workers identify career paths.

“Location matters. What does a loss of public benefits in Boston look like, versus a city like Springfield?” Kandilis said. “That's going to be very different when your rents, child care expenses, and other costs are different.”

The program will calculate a participating family’s yearly financial resources, including earnings and public benefits. Then, a cash payment system will be used to make up the difference as the family’s income slowly increases and benefits decrease.

For example, say a family’s total financial resources, including public assistance, is $40,000. Then, a small raise at work leads to a drop in public benefits, and their total financial resources drop to $35,000. The program would pay out $5,000 to get the family back to their starting point.

Kandilis: Data could show pilot reduces state costs

Kandilis said the program’s steering committee will complete and implement the payment system in collaboration with the state Department of Transitional Assistance. She said they hope to use data from the pilot to show that it reduces costs to the state as residents reduce their need for public benefits.

“We also hope to prove that it serves as a template for all communities in Massachusetts, and even nationally,” she said. “Every state has this issue.”

Read more about the Working Places initiative here.