Chapter 30

1. Chapter 30 Income, Poverty, and Health Care

2. Introduction A number of U.S. colleges advertise that a college graduate can anticipate earning at least $1 million more over a working lifetime than someone who has only a high school diploma. In this chapter, you will learn about higher education as a key determinant of differences in people’s incomes.

3. Learning Objectives Describe how to use a Lorenz curve to represent a nation’s income distribution Identify the key determinants of income differences across individuals Discuss theories of desired income distribution

4. Learning Objectives (cont'd) Distinguish among alternative approaches to measuring and addressing poverty Recognize the major reasons for rising health care costs Explain the key elements of the new U.S. national health insurance program and evaluate its potential economic effects

5. Chapter Outline Income Determinants of Income Differences Theories of Desired Income Distribution Poverty and Attempts to Eliminate It Health Care

6. Did You Know That ... During 2008, the wealth of people with at least $1 million in wealth declined by $33 trillion, or about two and a half times annual U.S. national income? This has affected the distribution of income. What other factors influence the distribution of income?

7. Income Income provides us a means of consuming and saving Can be payment for labor Can be payment for other factor Can be from gifts and government transfers

8. Income (cont'd) Distribution of Income The way income is allocated among the population based on groupings of residents

9. Income (cont'd) The Lorenz Curve A geometric representation of the distribution of income A Lorenz curve that is perfectly straight represents complete income equality The more bowed a Lorenz curve, the more unequally income is distributed

10. Figure 30-1 The Lorenz Curve

11. Income (cont'd) Criticisms of the Lorenz curve It does not include income in kind: income received in the form of goods and services, such as housing or medical care to be contrasted with money income, which is simply income in dollars, or general purchasing power, that can be used to buy any goods and services

12. Income (cont'd) Criticisms of the Lorenz curve (cont’d) It does not account for the differences in size of households or the number of wage earners households contain It does not account for age differences It ordinarily reflects money income before taxes It does not measure unreported income

13. Figure 30-2 Lorenz Curves of Income Distribution, 1929 and 2011

14. Income (cont’d) Income distribution in the United States In Table 30-1, we see the percentage share of income for households before direct taxes. The table groups households according to whether they are in the lowest 20 percent of the income distribution, the second lowest 20 percent, and so on. We see that in 2011, the lowest 20 percent had an estimated combined money income of 3.3 percent of the total money income of the entire population. This is less than the lowest 20 percent had at the end of World War II.

15. Table 30-1 Percentage Share of Money Income for Households Before Direct Taxes

16. Income (cont’d) The distribution of wealth Income—a flow—can be viewed as a return on wealth—a stock The distribution of income is not the same as the distribution of wealth Wealth includes tangible objects and human wealth

17. Figure 30-3 Measured Total Wealth Distribution

18. Determinants of Income Differences We know there are income differences; that is not in dispute A more important question is why these differences occur If we know, perhaps we can change policy, or better understand them

19. Determinants of Income Differences (cont'd) We will look at four determinants of income differences Age Marginal productivity Inheritance Discrimination

20. Determinants of Income Differences (cont'd) Age-Earnings Cycle The regular earnings profile of an individual throughout his or her lifetime

21. Determinants of Income Differences (cont'd) Age-earnings cycle At age 18, earnings from wages are relatively low Earnings gradually rise until they peak at about age 50 Earnings then fall until retirement, when they become zero

22. Figure 30-4 Typical Age-Earnings Profile

23. Determinants of Income Differences (cont'd) Marginal productivity Talent Experience Training Investment in human capital

24. Example: Women Discover Payoffs from Extra Education and Training Since 2007, for every 100 bachelor’s degrees earned by men in the United States, women have earned 135. Thus, although employed men still earn higher wages than employed women, the male-female wage differential has declined and it is likely to continue to narrow. This has caused a gradual shift in the U.S. income distribution. Female workers have also found that obtaining more education and training pays off in the form of higher income.

25. Determinants of Income Differences (cont'd) Inheritance 10% of inequality traced to inheritance Discrimination Different pay for equal MRP Equal pay for different MRP

26. Determinants of Income Differences (cont'd) Access to education Minorities have faced discrimination in the acquisition of human capital The unexplained income differential between whites and blacks is often attributed to discrimination in the labor market. Because no better explanation is offered, we will infer that discrimination in the labor market does indeed still exist

27. Theories of Desired Income Distribution The productivity standard “To each according to what she or he produces” Also called the contributive standard, or referred to as the merit standard Equality—the egalitarian principle “To each exactly the same”

28. Poverty and Attempts to Eliminate It Throughout history mass poverty has been accepted as inevitable Sustained economic growth has wiped out mass poverty in many countries How can there be so much poverty in a nation of such abundance?

29. Figure 30-5 The Official Poverty Rate in the United States

30. Poverty and Attempts to Eliminate It (cont'd) Defining poverty Official poverty level in 2011 for an urban family of four around $22,000 Adjusted based on CPI Does not include cash and non-cash transfer payments Absolute poverty not the same as relative poverty In a relative sense, poverty will always exist even if absolute poverty eliminated

31. Poverty and Attempts to Eliminate It (cont'd) The official poverty level is based on pretax income but not in-kind subsidies, like food stamps If we include such benefits, the percentage of people living below the poverty line drops dramatically Some of the nation’s official poor do not report all income Some of the nation’s official poor benefit from owning their own home

32. Figure 30-6 Relative Poverty: Comparing Household Income and Household Spending

33. Poverty and Attempts to Eliminate It (cont'd) Attacks on poverty: major income maintenance programs Social Security which has been called OASDI 90% of all employed persons covered In 2007, 49 million people received checks averaging $960 a month

34. Poverty and Attempts to Eliminate It (cont'd) Supplemental Security Income (SSI) Minimum income for the Aged Blind Disabled

35. Poverty and Attempts to Eliminate It (cont'd) Temporary Assistance to Needy Families (TANF) State administered program financed in part by federal grants The program provides aid to families in need.

36. Poverty and Attempts to Eliminate It (cont'd) Food stamps Government-issued coupons (or e-debit cards) that can be used to purchase food In 1964, some 367,000 Americans received food stamps In 2009, one in nine citizens received food stamps

37. Poverty and Attempts to Eliminate It (cont'd) Earned Income Tax Credit Program (EITC) Designed to provide rebates to low-income workers Each year federal government grants $43 billion in benefits Over one-fifth of all tax returns claim an EITC

38. Poverty and Attempts to Eliminate It (cont'd) No apparent reduction in poverty rates 1973: 11% 1983: 15% 1997: 12% Since then >14%

39. Health Care Health care is intimately related to the distribution of income and poverty

40. Health Care (cont'd) The U.S. health care situation Portion of national income spent on health care has risen steadily since 1965 16% of U.S. real GDP is devoted to spending on health care Per capita spending greater than anywhere else in the world

41. Figure 30-7 Percentage of Total National Income Spent on Health Care in the United States

42. Health Care (cont'd) Question Why have health care costs risen so much? Answers The age-health care expenditure equation New technologies Third-party financing

43. Health Care (cont'd) Third Parties Parties who are not directly involved in a given activity or transaction Fees may be paid by third parties (insurance companies, government)

44. Figure 30-8 Third-Party versus Out-of-Pocket Health Care Payments

45. Health Care (cont'd) Price, quantity demanded, and the question of moral hazard Large percent of medical services payments made by third parties Price to the consumer drops and the quantity demanded increases An individual with a zero deductible may engage in a less healthful lifestyle

46. Figure 30-9 The Demand for Health Care Services At P1 quantity demanded is Q1 If the price falls to zero, quantity demanded increases to Q2

47. Health Care (cont'd) Moral hazard as it affects physicians and hospitals Due to third-party payments, patients do not have to worry about the cost of operations and medical procedures Physicians and hospitals order more of them since they are reimbursed on the basis of medical procedures

48. Health Care (cont'd) Medicare expenditures are one of the most serious problems facing the federal government today The number of beneficiaries has increased from 19.1 million in 1966 to more than 40 million in 2011 Federal spending on Medicare has increased about 10% a year, adjusted for inflation

49. Figure 30-10 Federal Medicare Spending

50. Health Care (cont'd) Is national health insurance the answer? Over 40 million Americans are uninsured at some point during the year Federal spending might increase from $60 to $100 billion