Chapter 30 Powerpoint

Chapter 30
Income, Poverty,
and Health Care

Introduction
Three decades ago, the annual earnings of female
workers in the United States averaged about 63 percent
of annual earnings for male workers. This ratio has
now increased to 83 percent.
What role does education play in equalizing earnings
between genders? Why do some economists forecast
that average earnings for women may eventually
surpass average earnings of men?
In reading this chapter, you will understand the answers
to these questions.

Copyright ©2014 Pearson Education, Inc. All rights reserved.

30-2

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


30-3

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


30-4

Chapter Outline
•
•
•
•
•

Income
Determinants of Income Differences
Theories of Desired Income Distribution
Poverty and Attempts to Eliminate It
Health Care


30-5

Did You Know That ...
• Today, only 51 percent of adult U.S.
residents are married, as compared with 72
percent in 1960?
• Tax laws and government benefits are a
contributing factor to the decline in the
proportion of married adults.
• Also, many people between the ages of 18
and 24 delay marriage in order to obtain a
college education.


30-6

Did You Know That ... (cont’d)
• Economists have found that patterns of
marriage have substantial effects on the
distribution of income, which is the way that
income is allocated among the population.
• In this chapter, you will read about factors
determining the distribution of income as
well as the government’s new health care
program.


30-7

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


30-8

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


30-9

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


30-10

Figure 30-1 The Lorenz Curve


30-11

Income (cont'd)
• Criticisms of the Lorenz curve
1. 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


30-12

Income (cont'd)
•

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


30-13

Figure 30-2 Lorenz Curves of Income
Distribution, 1929 and 2013

Source: U.S. Department of Commerce.

30-14

Income (cont’d)
• Income distribution in the United States
– In Table 30-1 on the next slide, 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.


30-15

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


30-16

Example: U.S. Residents Move
Among Income Groups Over Time
• Economists Gerald Auten and Geoffrey Gee
have found evidence of considerable income
mobility among U.S. residents.
– They found that within a given 10-year period,
about 57 percent of people initially receiving
money incomes placing them in the lowest 20
percent moved into the group with the nexthighest 20 percent of incomes.
– Furthermore, the average money incomes of
people who began with incomes among the top
20 percent declined within each decade.

30-17

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


30-18

Figure 30-3 Measured Total Wealth
Distribution

Source: Board of Governors of the Federal Reserve.

30-19

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


30-20

Determinants of Income
Differences (cont'd)
• We will look at four determinants of income
differences
1. Age
2. Marginal productivity
3. Inheritance
4. Discrimination


30-21

• Age-Earnings Cycle
– The regular earnings profile of an individual
throughout his or her lifetime


30-22

• 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


30-23

Figure 30-4 Typical Age-Earnings
Profile


30-24

• Marginal productivity
– Talent
– Experience
– Training
– Investment in human capital


30-25

• Inheritance
– 10% of inequality traced to inheritance

• Discrimination
– Different pay for equal MRP
– Equal pay for different MRP


30-26

• 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


30-27

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”


30-28

• 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?


30-29

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

Source: U.S. Department of Labor.

30-30

(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 is not the same as relative
poverty
– In a relative sense, poverty will always exist
even if absolute poverty eliminated


30-31

(cont'd)
• Attacks on poverty: major income
maintenance programs
– Social Security which has been called OASDI
– 90% of all employed persons covered
– In 2013, 55 million people received checks
averaging $1,000 a month


30-32

(cont'd)
• Supplemental Security Income (SSI)
– Minimum income for the
• Aged
• Blind
• Disabled


30-33

(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.


30-34

(cont'd)
• Food stamps
– Government-issued coupons (or e-debit cards)
that can be used to purchase food
– The supplemental Nutrition Assistance Program
(SNAP, commonly known as “food stamps”)
provides government-issued, electronic debit
cards that can be used to purchase food.

• In 2013, almost one in every seven citizens
(including children) was receiving SNAP
benefits.

30-35

(cont'd)
• Earned Income Tax Credit Program (EITC)
– Designed to provide rebates to low-income
workers
– Each year federal government grants more than
$46 billion in these credits
– Over one-fifth of all tax returns claim an EITC


30-36

(cont'd)
• No apparent reduction in poverty rates
– 1973: 11%
– 1983: 15%
– 1997: 12%
– Since then >14%


30-37

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


30-38

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


30-39

Figure 30-6 Percentage of Total National Income
Spent on Health Care in the United States

Sources: U.S. Department of Commerce; U.S. Department of Health and Human Services; Deloitte
and Touche LLP; VHA, Inc.

30-40

• Question
– Why have health care costs risen so much?

• Answers
– The age-health care expenditure equation
– New technologies
– Third-party financing


30-41

What If . . . The government forced lower
spending on health care by placing legal limits on
prices?

• Legal ceilings on prices of health care
services would reduce the quantities of
services offered by physicians and hospitals,
and this would in turn reduce overall health
care expenditures.
• However, this would also diminish the
availability of medical treatment for illness
and injury.


30-42

• Third Parties
– Parties who are not directly involved in a given
activity or transaction
– Fees may be paid by third parties (insurance
companies, government)


30-43

Figure 30-7 Third-Party versus Out-ofPocket Health Care Payments

Sources: Health Care Financing Administration; U.S. Department of Health and Human
Services.

30-44

Figure 30-8 The Demand for Health Care
Services


30-45

• 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


30-46

Figure 30-9 Federal Medicare Spending

Sources: Economic Report of the President; U.S. Bureau of Labor Statistics.

30-47

• 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


30-48

• 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


30-49

Policy Example: Dual Coverage Drives Up
Federal Health Care Spending
• At present, 61 million elderly and disabled people
are enrolled in Medicare and 65 million low-income
citizens are covered by Medicaid.
• Both groups of people include about 10 million
individuals who qualify for “dual coverage,”
meaning that their health care expenses are
covered by both federal programs simultaneously.
• Poor administrative coordination between Medicare
and Medicaid gives a health care provider the
incentive to bill the one program that pays the
higher reimbursement rate.


30-50

• The nationalization of health care
• In March 2010, President Barack Obama
signed a law that will govern the future
operation of U.S. health care markets
• As shown in Table 30-2, the key features:
–
–
–
–

Government health insurance mandates
Government health care subsidies
Government health insurance exchanges
Regulations and taxes


30-51

Table 30-2 Key Components of the Federal
Government’s National Health Care Program


30-52

• Health Insurance Exchanges
– Government agencies to which the national
health care program assigns the task of assisting
individuals, families, and small businesses in
identifying health insurance policies to purchase


30-53

• Economic effects of the national health care
program include higher health care spending and a
worsened moral hazard problem
– Because the price people actually pay out-of-pocket will
decline, the quantity of health care services demanded will
increase
– Because health insurers will be required to cover an
expanded quantity of services, total expenditures on
health care will increase
– Because people will pay a smaller portion of the actual
cost of treating health problems, more individuals will
have reduced incentives to make decisions that promote
better health


30-54

International Policy Example: In Greece, “Free”
Care Now Includes Substantial Implicit Costs
• Any Greek resident is entitled to health care
provided by a plan called IKA National Insurance.
• Greek hospitals are financed by the nation’s
government, which recently has been unable to
borrowing sufficient operating funds.
• As a consequence, hospitals are often unable to
provide medications for patients.
• This has caused some patients to leave their
hospital rooms in order to obtain needed
medications from a private pharmacy through their
IKA insurance benefits.


30-55

• Economic effects of the national health care
program (cont’d)
– Impacts on the rest of the U.S. economy
– Labor market: The effective wage rate will increase as
firms are required to provide health insurance
– Market for goods and services: The increase in labor
costs that firms incur will raise their marginal costs
and thus their output prices
– Government budgets: The federal government
ultimately will have to search for ways to reduce its
health care expenditures and to raise more tax
revenues to fund the program


30-56

You Are There: A Portuguese Woman Rethinks
Her Human Capital Investment
• Isabel Fernandes is a 22-year-old Portuguese
woman who stopped attending school after the
eighth grade. Her limited education also limits her
prospects of finding a job.
• To improve her employment prospects, Fernandes
has become a part time student at a private,
nonprofit school.
• Friends have told her a high school degree might
give her sufficient background to wait tables at
restaurants. For the time being, however, she
hopes to find work as a cleaning woman.


30-57

Issues & Applications: Why Is the Female
Income Gap Shrinking?
• As Figure 30-10 on the next slide shows, women
earn lower average incomes than men. It also
reveals, however, that the gap between the
average female income and the average male
income has dropped from 37 percent in 1980 to
about 18 percent today.
• What accounts for the shrinkage of the female
income gap?
• Most economists agree that the key explanation is
a substantial increase in female investment in
human capital.


30-58

Figure 30-10 The Shrinking Female Income Gap

Sources: U.S. Department of Labor; author’s estimate.

30-59

Issues & Applications: Why Is the Female
Income Gap Shrinking? (cont’d)
• For a number of years, more females than males
have graduated from U.S. high schools.
• Women currently are earning 57 percent of the
degrees issued each year by U.S. colleges and
universities.
• Furthermore, 100,000 more women than men have
obtained master’s and doctoral degrees each year
since 2010. Thus, women are now better trained
for many high-income jobs.


30-60

Summary Discussion
of Learning Objectives
• Using a Lorenz curve to represent a nation’s
income distribution
– The more bowed a Lorenz curve, the more
unequally income is distributed

• Key determinants of income differences
across individuals
– Age
– Marginal productivity differences
– Discrimination


30-61

Summary Discussion
of Learning Objectives (cont'd)
• Theories of desired income distribution
– Productivity standard
– Egalitarian principle

• Alternative approaches to measuring and
addressing poverty
– Absolute poverty standard
– Relative poverty standard


30-62

Summary Discussion
• Major reasons for rising health
care costs
– Aging U.S. population
– Higher priced medical technologies
– Third-party financing of health
care expenditures
– Moral hazard


30-63

Summary Discussion
• Key provisions of the new U.S. national
health insurance program
– All individuals are required to purchase health
insurance
– Firms with more than 50 employees must
provide health insurance or pay penalties
– More low-income families will be placed in the
Medicaid program


30-64

Chapter 30 Powerpoint

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