© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/eO’Sullivan/Sheffrin Prepared by: Fernando Quijano and Yvonn Quijano CHAPTERCHAPTER 19 Economic Challenges: Poverty, Aging, and Health Care

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Who Are the Poor? A household is a group of related family members and unrelated persons who live in the same housing unit.A household is a group of related family members and unrelated persons who live in the same housing unit. The minimum amount the government estimates that a family needs to avoid being in poverty is the poverty budget.The minimum amount the government estimates that a family needs to avoid being in poverty is the poverty budget. The government computes the poverty budget by estimating the minimum food budget and multiplying by three.The government computes the poverty budget by estimating the minimum food budget and multiplying by three.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Who Are the Poor? The poverty budget in 1999 was $13,290 for a three-person household and $17,029 for a four-person household. The poverty budget in 1999 was $13,290 for a three-person household and $17,029 for a four-person household. A household whose income is less than the official poverty budget is considered poor.A household whose income is less than the official poverty budget is considered poor. The overall poverty rate in the U.S. in 1999 was 11.8% The overall poverty rate in the U.S. in 1999 was 11.8%

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Who Are the Poor? Poverty rates differ sharply by group:Poverty rates differ sharply by group: Race: Blacks and Hispanics are poorer than whites. The poverty rate for Asian- Americans is 14%.Race: Blacks and Hispanics are poorer than whites. The poverty rate for Asian- Americans is 14%. Family type: Female-headed households have a poverty rate that is about six times the rate for married couple households.Family type: Female-headed households have a poverty rate that is about six times the rate for married couple households.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Who Are the Poor? Age: The poverty rate of the elderly has decreased substantially, from 35% in 1959 to 9.7% in 1999.Age: The poverty rate of the elderly has decreased substantially, from 35% in 1959 to 9.7% in Education: High-school dropouts have twice the poverty rate of high-school graduates and eight times that of college graduates.Education: High-school dropouts have twice the poverty rate of high-school graduates and eight times that of college graduates.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Poverty Rates for Different Population Groups

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin What Causes Poverty? More than half of the poor households have someone who works at least part-time.More than half of the poor households have someone who works at least part-time. One in five poor households has someone who works full-time and year-round.One in five poor households has someone who works full-time and year-round. Poverty is not caused by the lack of a job. The problem is low wages and part-time employment.Poverty is not caused by the lack of a job. The problem is low wages and part-time employment. If a worker’s wage in a four-person household is less than $8.20 per hour, the household will be below the poverty line.If a worker’s wage in a four-person household is less than $8.20 per hour, the household will be below the poverty line.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin What Causes Poverty? The main determinants of poverty are:The main determinants of poverty are: Inadequate education.Inadequate education. Racial segregation.Racial segregation. Weak economy.Weak economy. Racial and gender discrimination in the labor market.Racial and gender discrimination in the labor market. Single parenthood.Single parenthood.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Anti-poverty Programs Spending on antipoverty programs accounts for about:Spending on antipoverty programs accounts for about: 14% of the federal budget.14% of the federal budget. 32% of state budgets.32% of state budgets. 5% of local-government budgets.5% of local-government budgets.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Anti-poverty Programs “The Personal Responsibility and Work Opportunity Reconciliation Act of 1996” is a comprehensive welfare-reform plan that abolished traditional antipoverty programs.“The Personal Responsibility and Work Opportunity Reconciliation Act of 1996” is a comprehensive welfare-reform plan that abolished traditional antipoverty programs. A new program, called Temporary Assistance to Needy Families (TANF), provides block grants to the states for designing and implementing programs that move poor adults from welfare dependence to employment.A new program, called Temporary Assistance to Needy Families (TANF), provides block grants to the states for designing and implementing programs that move poor adults from welfare dependence to employment.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Effects of Welfare Reform on the Market for Low-Skilled Labor The welfare-reform program requires welfare recipients to join the workforce.The welfare-reform program requires welfare recipients to join the workforce.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Effects of Welfare Reform on the Market for Low-Skilled Labor An increase in the number of low-skilled workers shifts the labor supply curve to the right.An increase in the number of low-skilled workers shifts the labor supply curve to the right.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Effects of Welfare Reform on the Market for Low-Skilled Labor At each wage, more hours of labor are supplied.At each wage, more hours of labor are supplied. The wage drops from $7.00 to $6.50 and the quantity of labor increases.The wage drops from $7.00 to $6.50 and the quantity of labor increases.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Effects of Welfare Reform on the Market for Low-Skilled Labor The increase in supply of low-skilled workers will decrease the equilibrium wages for low-skilled workers.The increase in supply of low-skilled workers will decrease the equilibrium wages for low-skilled workers.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin A Progress Report on Welfare Reform Between 1994 and 2000, the number of families on welfare dropped from 5 million to 2.2 million.Between 1994 and 2000, the number of families on welfare dropped from 5 million to 2.2 million. About two fifths of former welfare recipients are not working.About two fifths of former welfare recipients are not working.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin A Progress Report on Welfare Reform The poverty rate for children has decreased, however the incomes of the poorest fifth have continued to fall.The poverty rate for children has decreased, however the incomes of the poorest fifth have continued to fall. The average wage of former welfare recipients who are working is $7.00 per hour.The average wage of former welfare recipients who are working is $7.00 per hour.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Changes in Equilibrium Wages for High- School Dropouts and College Graduates Between 1980 and 2000, the supply of college graduates increased by more than the supply of high-school dropouts.Between 1980 and 2000, the supply of college graduates increased by more than the supply of high-school dropouts.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Changes in Equilibrium Wages for High- School Dropouts and College Graduates Because the demand for low-skilled labor decreased, the wage for high-school dropouts decreased.Because the demand for low-skilled labor decreased, the wage for high-school dropouts decreased.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Changes in Equilibrium Wages for High- School Dropouts and College Graduates Because the demand for high-skilled labor increased more than supply, the wage for college graduates increased.Because the demand for high-skilled labor increased more than supply, the wage for college graduates increased.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Changes in Equilibrium Wages for High- School Dropouts and College Graduates The combination of increase in supply and decrease in demand resulted in lower wages for high-school dropouts.The combination of increase in supply and decrease in demand resulted in lower wages for high-school dropouts.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Changes in Equilibrium Wages for High- School Dropouts and College Graduates Because the college wage increased and the dropout wage decreased, the relative wage of college graduates increases.Because the college wage increased and the dropout wage decreased, the relative wage of college graduates increases.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Dependency Ratios for Japan and the United States The dependency ratio is the ratio of the population over 65 years of age to the population between 20 and 65 years of age.The dependency ratio is the ratio of the population over 65 years of age to the population between 20 and 65 years of age.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Social Security System The reason for the low rate of poverty for the elderly is the Social Security system.The reason for the low rate of poverty for the elderly is the Social Security system. The Social Security system is a government program that provides retirement, survivor, and disability benefits.The Social Security system is a government program that provides retirement, survivor, and disability benefits.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Social Security System Over 92% of the civilian workforce is included in the Social Security system today.Over 92% of the civilian workforce is included in the Social Security system today. Workers receive either retirement benefits at age 65 or reduced benefits at age 62.Workers receive either retirement benefits at age 65 or reduced benefits at age 62. A recipient with dependents receives 50% more than a recipient without dependents.A recipient with dependents receives 50% more than a recipient without dependents. If a worker dies, survivor benefits are provided to the family.If a worker dies, survivor benefits are provided to the family.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Social Security System Social security also provides disability payments for workers unable to work for a minimum of one year.Social security also provides disability payments for workers unable to work for a minimum of one year. Retirement, survivor and disability benefits are determined by an average of the wages the worker earned during employment.Retirement, survivor and disability benefits are determined by an average of the wages the worker earned during employment. Workers who earned lower wages are compensated by a “replacement rate.”Workers who earned lower wages are compensated by a “replacement rate.”

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Social Security System Medicare provides health benefits to people over 65 years of age and is another major part of the Social Security system.Medicare provides health benefits to people over 65 years of age and is another major part of the Social Security system. The Social Security system is financed with a flat payroll tax and, as a whole, redistributes income toward low-wage workers.The Social Security system is financed with a flat payroll tax and, as a whole, redistributes income toward low-wage workers. As a result of the redistribution, the system is viewed as a social insurance system that compensates individuals for bad luck or low skills.As a result of the redistribution, the system is viewed as a social insurance system that compensates individuals for bad luck or low skills.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Coming Financing Crisis A financing mechanism called the pay-as- you-go system uses the payroll taxes in a given year to pay for the benefits received by retirees in that same year.A financing mechanism called the pay-as- you-go system uses the payroll taxes in a given year to pay for the benefits received by retirees in that same year. Throughout much of its history, retirees under Social Security received vastly more in benefits than they paid in taxes.Throughout much of its history, retirees under Social Security received vastly more in benefits than they paid in taxes.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Coming Financing Crisis The future of the pay-as-you-go system is dismal for two reasons:The future of the pay-as-you-go system is dismal for two reasons: As the average age of the population increases leaving fewer workers per retiree.As the average age of the population increases leaving fewer workers per retiree. Medical costs have risen rapidly, and they are expected to continue rising. Rising medical costs increase the costs of Medicare.Medical costs have risen rapidly, and they are expected to continue rising. Rising medical costs increase the costs of Medicare.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Challenge: Financing the Elderly There are three possible approaches of dealing with the problem of supporting an aging population:There are three possible approaches of dealing with the problem of supporting an aging population: Preserve future benefits but invest more today.Preserve future benefits but invest more today. Cut benefits.Cut benefits. Privatize the entire system.Privatize the entire system.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Problems with Our Health-Care System The United States spends a relatively large fraction of total income on health care.The United States spends a relatively large fraction of total income on health care.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Problems with Our Health-Care System Most observers believe that much of our spending on health care is not worthwhile.Most observers believe that much of our spending on health care is not worthwhile.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Problems with Our Health-Care System In making spending decisions, we should be guided by the marginal principle.In making spending decisions, we should be guided by the marginal principle. Marginal PRINCIPLE Increase the level of an activity if its marginal benefit exceeds its marginal cost; reduce the level of an activity if its marginal cost exceeds its marginal benefit. If possible, pick the level at which the activity’s marginal benefit equals its marginal cost.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Problems with Our Health-Care System In the health sector, we constantly violate the marginal principle.In the health sector, we constantly violate the marginal principle. Common medical procedures for the elderly have costs that exceed the benefits.Common medical procedures for the elderly have costs that exceed the benefits. There is a temptation to use new technology regardless of its cost.There is a temptation to use new technology regardless of its cost.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Problems with Our Health-Care System Health Maintenance Organizations (HMOs) are a type of system that provides doctors and hospitals with incentives to cut costs.Health Maintenance Organizations (HMOs) are a type of system that provides doctors and hospitals with incentives to cut costs. A health system in which HMOs and similar organizations compete for patients is commonly known as managed competition.A health system in which HMOs and similar organizations compete for patients is commonly known as managed competition.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Problems with Our Health-Care System In 2000, about 43 million people (or about 15% of the population) were not covered by health insurance.In 2000, about 43 million people (or about 15% of the population) were not covered by health insurance. The uninsured are those people and their families who do not receive insurance through their employers, are unemployed or between jobs, or are poor but do not qualify for Medicaid in their state.The uninsured are those people and their families who do not receive insurance through their employers, are unemployed or between jobs, or are poor but do not qualify for Medicaid in their state.

© 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Challenge: Reforming the System Key debates for the reform of the health care system include:Key debates for the reform of the health care system include: Work toward universal coverage.Work toward universal coverage. Reform MedicareReform Medicare Reform insurance marketsReform insurance markets Manage technological change.Manage technological change.