Chapter 31

Income, Poverty, and Health Care

Slide 31-2

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 31-3

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

Slide 31-4

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 31-5

Income

Determinants of Income Differences

Theories of Desired Income Distribution

Poverty and Attempts to Eliminate It

Health Care

Chapter Outline

Slide 31-6

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 31-7

Income

Income sources– Payment for a factor of production

– Gifts

– Government transfers

Distribution of Income– The way income is allocated among the

population

Slide 31-8

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 31-9

The Lorenz Curve

Figure 31-1

100

75

50

2825

100

Completeequality

Inequalitygap

Actual moneyincomedistribution

7550

45°

250

Cumulative Percentage of Households

Cum

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Pe

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oney

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Slide 31-10

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 31-11

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 31-12

Lorenz Curves of Income Distribution, 1929 and 2005

Figure 31-2

100

80

60

40

20

100806040200

Cumulative Percentage of Households

Completeequality

1929

2005

Cum

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Slide 31-13

Percentage Share of Money Incomefor Households Before Direct Taxes

Table 31-1

Slide 31-14

International Example:Income Inequality in the U.S.

Figure 31-3

Slide 31-15

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 31-16

Determinants of Income Differences

Age

– Age-Earnings Cycle• The regular earnings profile of an individual

throughout his or her lifetime

Slide 31-17

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 31-18

Typical Age-Earnings Profile

Figure 31-5

6555453518 250

Age

(Rea

l) A

nnua

l Ear

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s

Slide 31-19

Determinants of Income Differences

Marginal productivity

– Talent

– Experience

– Training

– Investment in human capital

Slide 31-20

Determinants of Income Differences

Inheritance

– 10 percent of inequality traced to inheritance

Discrimination

– Different pay for equal MRP

– Equal pay for different MRP

Slide 31-21

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 31-22

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 31-23

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 31-24

Theories of Desired Income Distribution

Productivity

– “To each according to what he or she produces.”

Equality

– “To each exactly the same.”

Slide 31-25

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 31-26

Official Number of Poor in the United States

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