ReWORKing Welfare Technical Assistance for States and Localities. 38. Financial Incentives


Financial incentives are a popular part of state welfare reform efforts. As of May 1996, 30 states had been granted federal waivers to make changes in earnings disregards to help make work pay and ease the transition from welfare to work. By changing the way earnings are counted in determining a family's monthly welfare grant, financial incentives allow recipients to keep more of their earnings from work while still receiving welfare. Financial incentives can also address one of the main criticisms of a work first approach: that it leads to low-wage jobs without benefits, leaving employees in a worse financial position than when they were on welfare. However, it must be recognized that financial incentives will also keep many participants on welfare longer than they otherwise would have been, by raising the level of earnings at which they become ineligible. In additional to its fiscal implications, this poses potential problems in the context of time limits (see section 40).

Financial Incentives and Work First Programs

Field research suggests that, used together, work first and financial incentives might be more powerful than either would be alone, for the following reasons:

  • Financial incentives can help motivate participants to work. Surveys indicate that welfare recipients have a general desire to work, yet many believe that welfare provides better for their families than work would. In addition, many welfare recipients report that they have worked in the past but have fallen back on welfare because they could not make ends meet. Financial incentives can alter the trade-off between welfare and work.
  • Financial incentives allow participants to accept even low-wage or part-time work. Financial incentives allow case managers to promote-and participants to see-the value of even part-time or low-wage work, and even for participants who are at the same time pursuing education or training. By providing financial support for work, the incentives can also help those who get low-wage jobs keep them.
  • Financial incentives can add a more positive message to work first. Financial incentives form a positive message that work will pay and that the welfare system will support recipients' efforts to work. Programs that include financial incentives tend to market the opportunities presented by working, whereas those without them are forced to rely more heavily on the threat of sanctions.
  • Financial incentives can help shift staff attitudes to a work first philosophy. In Los Angeles, increased earnings disregards played a big role in building staff support for a work first approach. Any reservations that staff may have about pushing recipients into work or being involved with a mandatory program can be eased by the knowledge that if participants pursue work, they will be better off financially.
  • Financial incentives can help change the culture of the eligibility office. Financial incentives inject discussions about employment into the eligibility office, as workers explain the benefits of working to both applicants and recipients. In Minnesota, eligibility staff reported that they felt financial incentives empowered them for the first time to discuss work with participants.
  • Financial incentives may boost the income-producing power of work first models. While work first programs have been successful at increasing employment, research has not shown that such programs consistently increase the income of those who get jobs. Financial incentives can address this problem by supplementing the incomes of participants who get jobs.

Making the Most of Financial Incentives

Financial incentives will increase the income of participants who would have gone to work even in their absence, and thus will help to make work pay for those people. In order to increase total employment, however, the incentives must encourage participants to go to work who would not have gone to work otherwise. The following ideas can help make this happen by promoting communication about and marketing of financial incentives:

  • Market financial incentives early and often. Let new welfare applicants know right away that the incentives can support their efforts to work. Repeat the message in both the eligibility and work first offices, in all discussions about work. Participants who have tried to work and failed may need "proof" that the incentives are real. Keeping the disregard formula as simple as possible, as well as developing effective brochures and sample budgets, may help convince them. Some programs provide participants with blank calculation forms on which they can plug in their own numbers when considering a job.
  • Make sure that staff-in both work first and eligibility offices-understand how the financial incentives work. Staff should be able to explain the details of financial incentives to participants, so that they know exactly what will happen to their grant if they take a job at a given salary. Computer systems can be programmed to quickly calculate these effects for staff and participants. Staff should also understand any trade-offs that might affect how financial incentives work for individual participants; for example, those in public housing may face increased rents as a result of increased earnings. Finally, eligibility staff need to know how to implement the increased disregards so that participants who work receive the appropriate benefits.
  • Help participants who work access the financial benefits. When participants get a job, work first staff should remind them about the financial incentives, provide them with any forms that need to be completed, and facilitate communication with the eligibility office. Simplifying reporting requirements can also help. Some programs hold special orientations for newly employed participants to review financial incentives and transitional benefits, and to demonstrate how to fill out the reporting forms. Work first staff in several programs report that financial incentives are not always consistently or accurately applied. When necessary, program staff should act as advocates, to help participants obtain those benefits.
  • Let participants who work clearly see their financial gain. When participants find employment, they should see the financial incentives at work, increasing their total income, even though their monthly grant may be reduced. Eligibility staff can review the benefits calculation with participants after they receive their first recalculated grant check. Administrators in Milwaukee's New Hope Project found that employed participants had a hard time understanding how the incentive worked, because the supplemental benefit amount changed each month (mainly due to fluctuations in hours and in the number of pay periods in the month). To address this problem, the program now sends participants an individualized explanation of the benefits calculation as part of their monthly benefits statement.