Chapter 30 Powerpoint

Chapter 30

Income, Poverty, and Health Care

Copyright ©2014 Pearson Education, Inc. All rights reserved. 30-2

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.


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


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


Chapter Outline

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


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.


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.


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


Income (cont'd)

• Distribution of Income

– The way income is allocated among the population based on groupings of residents


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


Figure 30-1 The Lorenz Curve


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


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


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

Source: U.S. Department of Commerce.


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.


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


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 next-highest 20 percent of incomes.

– Furthermore, the average money incomes of people who began with incomes among the top 20 percent declined within each decade.


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


Figure 30-3 Measured Total Wealth Distribution

Source: Board of Governors of the Federal Reserve.


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


Determinants of Income Differences (cont'd)

• We will look at four determinants of income differences

1. Age

2. Marginal productivity

3. Inheritance

4. Discrimination



• Age-Earnings Cycle

– The regular earnings profile of an individual throughout his or her lifetime



• 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


Figure 30-4 Typical Age-Earnings Profile



• Marginal productivity

– Talent

– Experience

– Training

– Investment in human capital



• Inheritance– 10% of inequality traced to inheritance

• Discrimination– Different pay for equal MRP

– Equal pay for different MRP



• 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


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”


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?


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

Source: U.S. Department of Labor.


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 is not the same as relative poverty

– In a relative sense, poverty will always exist even if absolute poverty eliminated



• 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



• Supplemental Security Income (SSI)

– Minimum income for the

• Aged

• Blind

• Disabled



• Temporary Assistance to Needy Families (TANF)

– State administered program financed in part by federal grants

– The program provides aid to families in need.



• 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.



• 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



• No apparent reduction in poverty rates

– 1973: 11%

– 1983: 15%

– 1997: 12%

– Since then >14%


Health Care

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


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


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.



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

• Answers – The age-health care expenditure equation

– New technologies

– Third-party financing


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.



• Third Parties

– Parties who are not directly involved in a given activity or transaction

– Fees may be paid by third parties (insurance companies, government)


Figure 30-7 Third-Party versus Out-of-Pocket Health Care Payments

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


Figure 30-8 The Demand for Health Care Services



• 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


Figure 30-9 Federal Medicare Spending

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



• 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



• 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


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.



• 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


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



• 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



• 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


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.



• 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


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.


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.


Figure 30-10 The Shrinking Female Income Gap

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


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.


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


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



• Major reasons for rising health care costs

– Aging U.S. population

– Higher priced medical technologies

– Third-party financing of health care expenditures

– Moral hazard



• 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

Chapter 30 Powerpoint

Education

Transcript of Chapter 30 Powerpoint