1. Income, Poverty, and Health Care
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 Answers
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

51. Health Care (cont'd)
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

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

53. Health Care (cont'd) 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

54. Why Not … have all physicians work for the federal government?
One difficulty is that the government would have to determine what the equilibrium payments to physicians in various specializations otherwise would be in a private market.
Too low the payments would result in physician shortages in delivering the care promised by the national health care program.

55. Health Care (cont'd)
Economic effects of the national health care program
Higher health care spending and a worsened moral hazard problem
Because the price people actually pay out of their own pockets to consume health care services will decline, the quantity of health care services demanded will increase
Because health insurers will be required to cover this expanded quantity demanded 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.

56. Health Care (cont'd)
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 now 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

57. International Example: The U. S
International Example: The U.S. Health Care Program’s Benefits for Indian Workers
Among the increasing number of U.S. firms that outsource labor are health insurers, most of which hire workers in India to perform a variety of record-keeping tasks.
The new health care law has imposed many new record-keeping requirements on health insurers.
Thus, implementation of the new U.S. health care program has increased demand for outsourced Indian labor.

58. You Are There: In Massachusetts, Public Health Care Means Price Controls
The governor of Massachusetts responds to the rising costs of its state health care program, in which everyone is charged nearly the same premiums, by giving the state health care regulator the power to review the prices charged by physicians and hospitals.
If the regulator determines that current prices are too high, then the state government will establish ceilings on health care prices.

59. Issues & Applications: Is Your College Degree Worth $1 Million?
The $1 million lifetime income differential claimed is the annual income boost of $26,000 from attending college, multiplied by 40 years.
Table 30-3 shows that the average lifetime earnings drop to $711,243 if the discounted present value of $1 million is computed at an annual interest rate of just 2 percent.
The net income gain should also include explicit expenses ($18,000 annually) and the opportunity cost ($32,000 annually) of attending college for four years.

60. Table 30-3 Estimated Lifetime Income Gains from Obtaining a College Degree

61. 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

62. 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

63. Summary Discussion of Learning Objectives (cont'd)
Major reasons for rising health care costs
Aging U.S. population
Higher priced medical technologies
Third-party financing of health care expenditures
Moral hazard

64. Summary Discussion of Learning Objectives (cont'd)
Economic effects of the national health care program
Higher health care spending and a worsened moral hazard problem
Impacts on the rest of the U.S. economy
Labor market
Market for goods and services
Government budgets