Chapter 31

Income, Poverty, and Health Care

Introduction

The price of health care services is continually growing more quickly than the overall rate of inflation.

Does this mean that there is a health care crisis? Is government financing of health care necessary?

Slide 31-2

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 Slide 31-3

Learning Objectives

 Distinguish among alternative approaches to measuring and addressing poverty  Recognize the major reasons for rising health care costs  Describe alternative approaches to paying for health care Slide 31-4

Chapter Outline

 Income

 Determinants of Income Differences

 Theories of Desired Income Distribution

 Poverty and Attempts to Eliminate It

 Health Care Slide 31-5

Did You Know That...

 During the 2001-2002 recession, both the highest-income households and the lowest-income households experienced declines in income?  The result was that the U.S. distribution of income became relatively more equal?

Slide 31-6

Income

 Income sources – Payment for a factor of production – Gifts – Government transfers  Distribution of Income – The way income is allocated among the population Slide 31-7

Income

 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 Slide 31-8

Figure 31-1

The Lorenz Curve

100 75 Inequality gap Complete equality 50 28 25 0 Actual money income distribution 45 ° 25 50 75 Cumulative Percentage of Households 100 Slide 31-9

Income

 Criticisms of the Lorenz curve – It does not include income in kind .

• Income received in the form of goods and services – It does not account for the differences in size of households or the number of wage earners households contain.

Slide 31-10

Income

 Criticisms of the Lorenz curve – – It does not account for age differences.

It ordinarily reflects money income

before

taxes.

– It does not measure unreported income.

Slide 31-11

Lorenz Curves of Income Distribution, 1929 and 2005

100 80 60 40 Complete equality 2005 1929 20 0 20 40 60 80 Cumulative Percentage of Households 100 Figure 31-2 Slide 31-12

Percentage Share of Money Income for Households Before Direct Taxes

Table 31-1 Slide 31-13

International Example: Income Inequality in the U.S.

Figure 31-3 Slide 31-14

The Distribution of Wealth

 The distribution of income is not the same thing as the distribution of wealth.

 Income is a flow variable; wealth is a stock.

 Income can be viewed as a return on wealth.

Slide 31-15

Determinants of Income Differences

 Age – Age-Earnings Cycle • The regular earnings profile of an individual throughout his or her lifetime Slide 31-16

Determinants of Income Differences

 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.

Slide 31-17

Typical Age-Earnings Profile

Figure 31-5 0 18 25 35 Age 45 55 65 Slide 31-18

Determinants of Income Differences

 Marginal productivity – Talent – Experience – Training – Investment in human capital Slide 31-19

Determinants of Income Differences

 Inheritance – 10 percent of inequality traced to inheritance  Discrimination – Different pay for equal MRP – Equal pay for different MRP Slide 31-20

Determinants of Income Differences

 Access to education – Non-white urban males income is reduced 23 to 27 percent because of low quality education • Discrimination Slide 31-21

Example: The Urban-Rural Income Gap in China

 The best primary and secondary schools in China are located in the major cities.

 The rural schools lag behind in quality.

 As a result, the human capital acquired by students in rural areas is declining relative to what is being accumulated by residents of the major cities.

Slide 31-22

Determinants of Income Differences

 Doctrine of Comparable Worth – The belief that women should receive the same wages as men if the levels of skill and responsibility in their jobs are equivalent Slide 31-23

Theories of Desired Income Distribution

 Productivity – “To each according to what he or she produces.”  Equality – “To each exactly the same.” Slide 31-24

Poverty and Attempts to Eliminate It

 Mass poverty can no longer be said to be a problem in the Western world.

 The U.S. engages in a fair amount of income redistribution.

 There is always a need to assess whether the programs are successful.

Slide 31-25

Official Number of Poor in the United States

Figure 31-6 Source: U.S. Department of Labor Slide 31-26