Spotlight

When More Work Doesn't Pay: The Impacts of the Loss of Means-Tested Benefits on Discretionary Income for Low and Middle-Income Families

Jennifer Romich is a WCPC Affiliate and Assistant Professor at the University of Washington School of Social Work. She combines the disciplines of economics and human development in her research on employment, family processes and use of tax and social benefits by low-income families. WCPC took this opportunity to ask for her thoughts on her recent work on effective marginal tax rates for low-income working families.

WCPC: How did you become interested in what happens for low-income families when their earnings increase?

Romich: Julie Kerksick, the Executive Director of the New Hope Project encouraged me to think about it. New Hope is a Milwaukee-based community organization which promotes work-based solutions to poverty. I worked on the research team evaluating the New Hope demonstration project in the late 1990s. It was frustrating for Julie and the New Hope staff to work hard to help support clients in getting jobs and moving up in their jobs, only to have other benefits cut out and taxes increase. So New Hope started a public education and advocacy campaign called "Making Work Continue To Pay" in order to address this problem.

WCPC: What was the most striking part about working with these families?

Romich: Because I met the families in the context of being on the New Hope evaluation team, one of the most striking things to me was that most of the respondents hardly thought about New Hope at all. Although our study focused on figuring out whether and how New Hope made a difference in families' lives, from their perspectives it was just another office they went to once and a while. It was a good perspective-gaining experience for a young researcher.

WCPC: What was the most significant finding to you?

Romich: On thing that stood out was how much returns to additional earnings could vary from family to family. One finding from pre-welfare reform research was that recipients of means-tested programs (welfare and food stamps) would rely on social and family networks for information about how "the system" worked. For instance, someone might know from their friends that reporting one type of income was fine but reporting another type of income would result in a benefit cut. When I tracked the supports used by the 40 families in this study, I found 40 different combinations of benefit use and family type. That meant that one person could get a raise and the only difference would be that their family had a little more money, but someone else might get a raise and lose a substantial housing allowance. One implication is that knowing a friend's experience cannot tell you much about your own future.

WCPC: What questions does this research raise for future inquiry?

Romich: One big question that to me is still largely unanswered is "what is the effect of all of this?" Does it reduce work effort? Or just make people frustrated? Or have no effect at all? With a few exceptions, econometric studies have not really been able to find any labor supply effects of large marginal tax rates. I think this is because it's such a tricky topic to get at, not because there really are no effects.

WCPC: What implications does this study have for policy makers?

Romich: I'd like to think there are two levels of implications. On a practical level, some thought could go into how benefits work together. At least don't make everything phase out over the same relatively narrow income phase.

On a moral level, I like to say that the promise of welfare reform is only half delivered. Reforms in the 1990s made work pay more than welfare. However, in some cases, more work doesn't pay more than less work. That, I think, is a problem. Benefits to the poor phase out quickly and well before families can take advantage of some of the other supports (such as the mortgage interest deduction or tax-advantaged retirement savings). The most succinct statement of this is from one of the respondents in the qualitative piece. After getting a promotion at work, the increase in take-home pay was almost fully offset by decreases in her food stamps and housing subsidy. Her comment: "It's like being persecuted for getting a raise. This is why people don't want to work."