THE CHANGE IN THE FEDERAL ROLE THAT WOULD RESULT FROM S. 1991

Unlike H.R. 15119 which adheres generally to the traditional legislative role of the federal and state governments for unemployment insurance purposes, S. 1991 calls for the federal government to assume many of the responsibilities heretofore reserved to the states. The proposed legislation would materially change the California law, as the discussion below indicates.

Qualifying requirements

Ever since the California program has been in operation, claimants have had to earn some minimum amount of wages in their base year in order to gain benefit entitlement. There is no time-worked requirement such as 20 weeks of work in the base year. The base-year earnings requirement customarily has been kept low in comparison with prevailing wages. California typically has many short-time workers in its labor force because of the nature of our industries. Here, large numbers of people are needed to work in logging and lumbering activities, in fishing and fish canneries, in fruit and vegetable canneries and packing houses, and in various services related to agriculture. Here, too, is the main concentration of the entertainment industry-motion picture, radio, and television production and similar activities. The tourist industry also is an important one in California, and it requires extra workers for the winter season at desert and ski resorts and for the summer season in the mountain and beach areas.

Because much of the labor demand has been for less than year-round workers, the California Legislature has consistently rejected any eligibility requirements that would rule out of benefit status those workers who were employed more than just casually. Consequently, from 1955 to 1965, the minimum earnings requirement in a base year was held at $600. In the 1965 Session of the California Legislature, the money requirement was raised to $720, a modest increase of 20 percent compared with a 47 percent rise in wages, a 150 percent advance in the minimum weekly benefit, and a 97 percent increase in the maximum weekly benefit during the same period.

S. 1991 would require that the benefit entitlement provision be no more than 20 weeks in the base year or the equivalent. The equivalent-the provision California would have to follow-is defined as five times the average weekly wage. Depending upon the coverage provisions adopted, California's base year earnings requirement would have to drop back to $600 or $625. This would return it to about where it was starting in 1955.

Under present coverage provisions, the average weekly wage is $125. To meet the current $720 base-year qualification, only 5.8 weeks of work is needed. At the minimum wage of $52, only 13.7 weeks of base-year work is required. These qualifications for admission to benefit status appear quite easy, and yet under S. 1991 they would become easier still.

The Administration has noted that there has been a tendency for states to balance increases in benefits with increases in minimum qualifying requirements. This tendency appears to be the reason for the proposed ceiling on eligibility provisions. And, yet, if wages increase and thus push up benefits, it would seem logical that the same wage gains should result in increases in the minimum entitlement provisions.

Allowed, too, in the proposed ceiling to be placed on state eligibility requirements is that states might adopt provisions to eliminate short-time workers. In addition to the base-year earnings of five times the average weekly wage, states might also require claimants to have either: (1) one-third of their base-year earnings outside their quarter of highest earnings, or (2) base-year earnings of 40 times their weekly benefit.

The problems of trying to fit work patterns into such artificial time spans as the calendar quarter are well-known in California. For some years, the California law contained a secondary eligibility requirement which was intended to rule out the very short-term workers. Known as the "75-percent rule", in its most recent form it applied only to claimants having very low base-year earnings those between $600 and $750. If these claimants earned more than threefourths of their base-year wages in a single calendar quarter, they had to have more earnings to qualify for benefits than did claimants whose previous wages were spread over a longer period of their base year. This special provision resulted in certain inequities. For example, two claimants might work the same length of time in their base year and earn the same amount of wages; yet because of the timing of their employment, one might qualify for benefits while the other

would not. Over the years, the California Legislature modified the provision a few times and finally elimiated it completely in 1965. At the end, relatively few claimants were affected at all by the provision because most earned $750 or better in their base year. The secondary requirement permitted by S. 1991 that claimants have one-third of their base-year wages outside their quarter of highest earnings is more restrictive than California's recently repealed 75-percent rule.

The alternative allowable eligibility requirement of 40 times the weekly benefit amount would have even more stringent effects on California claimants. Because the smallest weeky benefit payable is $25, at the minimum a claimant would have to have $1,000 (40 x $25) in base-year earnings as well as meeting the $600 or $625 minimum the bill also calls for.

It is recognized, of course, that both of these secondary requirements for benefit entitlement are ceilings, and that states could go below them. California, for example, could enact a provision that would reestablish the 75-percent rule and apply it to all claimants, the high earners as well as the low ones. Or, instead of the 40-times provision, perhaps a 30-times requirement could be enacted.

In any case, though, it would be extremely difficult to turn back the clock. Many California claimants who are accustomed to drawing benefits would be cut off the rolls by either of these two provisions that states could adopt. The requirement of earnings outside the high quarter would eliminate 12 percent of present claimants. The 40-times-the-weekly-benefit-amount provision would cut off 18.5 percent of the claimants now eligible. Without trying to second-guess the California Legislature but taking into account the legislative history of eligibility provisions in the California unemployment insurance program, it would seem that either course would be unacceptable even if the maximum requirements were modified. If this were the case, the California law would have to be revised simply to return the base-year money requirement to $600 or slightly higher, thus reducing further any attempt at requiring claimants to have some reasonable degree of past labor market attachment.

The Administration has advocated that the qualifying requirement "should be high enough to eliminate workers with insignificant past employment. . . ." Yet the proposed qualifying standard would have quite a different effect upon the California program.

The weekly benefit requirement

California's weekly benefit payments long have been among the most generous of any in the country. The smallest weekly payment a claimant can receive is $25, an amount that is nearly one-half of the minimum weekly wage of $52 for full-time work. At the top is the maximum weekly benefit of $65, which is 52 percent of average weekly insured wages in California.

Currently estimated is that slightly more than six out of every 10 claimants draw benefits that are 50 percent or more of their former gross weekly wages. Another three the especially high-paid workers-are limited by the $65 maximum from being compensated for one-half of their previous gross wages. Within the range of the minimum and the maximum, therefore, only one out of every ten claimants-because of the complexities of the benefit formula-gets a little less than one-half-say 49 percent-in weekly benefits of what his former gross weekly wages amounted to. If the weekly benefits are related to take-home or after-tax wages, all claimants except the extremely high earners would receive payments amounting to at least one-half of their prior earnings.

Instead of merely following some arbitrary standard in arriving at weekly benefit amounts, the California Legislature regularly takes a careful look not only at the weekly earnings but also at the claimants' base-year wages and usual work patterns in arriving at an appropriate benefit schedule. The 1965 legisla tive changes, for example, were based on a two-year study of the program. This interim study included a comprehensive survey of the characteristics of claimants-who they were, how much they worked, where they worked, how much they earned, their movements into and out of the labor force, their contributions to the family income, and many other factors. Here there is, in other words, some valid and logical foundation for determining what the maximum weekly benefit should be and also what the extent of wage-loss compensation should be below the top weekly payment.

The benefit standard proposed in S. 1991 would seem in practice to call for an automatic escalation of the maximum weekly benefit in accordance with increases in the average weekly wage. California had just such an automatic

feature in a related program, the temporary disability insurance program, from 1961 to 1965. Because top weekly benefits moved up without legislative review and action, a number of program difficulties occurred. To remedy the situation, the California Legislature in the 1965 Session removed the automatic provision and returned to the practice of regularly considering necessary benefit increases. Some states apparently have found the automatic feature to be a feasible method of keeping benefits in line with wages. The California experience, however, was to the contrary.

The duration requirement

The length of time that California claimants can draw benefits varies with their previous employment experience; between the minimum number of weeks of payment and the maximum, claimants receive one week of benefits for the equivalent of one week of work. A claimant who worked the equivalent of 12 or fewer weeks in his base year would be entitled to the minimum duration of regular payments-12 weeks. At the top of the range, a claimant having the equivalent of at least 26 weeks of work in his base year could draw 26 weeks of regular benefits. This variable duration feature reflects the character of California's employment patterns described above. The short-term workers receive payments for a fewer number of weeks than do the workers who are employed more steadily.

The duration requirement proposed in S. 1991 would upset this balance. This is because the bill proposes that as a minimum all claimants having the equivalent of 20 weeks of work be entitled to 26 weeks of benefits. Thus, many California claimants who typically work less than half a year could draw benefits for 26 weeks or one-half a year, more weeks of compensation than they had of employment. Now, 71 percent of the California claimants are entitled to 26 weeks of benefits; the proposed change would entitle about 88 percent to the top duration. Adoption of the proposal would mean that many short-time workers would be compensated to the extent of nearly all of their previous year's earnings, while the steady workers would recover considerably less. It also would mean for the claimants who usually work only a part of the year that the benefits would be more of a wage subsidy than an insurance payment. The disqualification standard

California law provides that a claimant who leaves his employment without good cause or who is discharged for misconduct in connection with his work is disqualified from benefits until he has gone back to work in bona fide employment and earned five times his weekly benefit amount. "Good cause" for voluntarily leaving a job includes personal reasons as well as those which are workrelated. This provision was enacted in 1965 as the result of general awareness that the program was open to misuse by some claimants. Previously, such disqualifications called for a five-week benefits postponement.

The present provision was a part of the Legislature's "Committee Bill". Awareness of the growing problem, however, was not confined to the Legislature. The Governor's recommended legislation also included a stricter provision for voluntary quit and misconduct discharge disqualifications than the one that had been in force.

The California labor force is an unusually mobile one. Workers move into and out of the state, from one part of the state to another, and from one job to another. Even when unemployment is high as it has been in recent years, employment growth continues. New job opportunities and those resulting from voluntary labor turnover provide substantial numbers of openings. The availability of jobs coupled with labor force movements tend to contribute to the substantial numbers of voluntary separations from employment.

A federal disqualification requirement that would limit the state provision to mere postponement of payments would give rise to the same situations that led to the enactment of the 1965 provision. The six-week maximum period of postponement specified in S. 1991 would be less effective than the 13-week ceiling recommended by the Secretary of Labor in his presentation before this Commitee on July 13, 1966. In either case, though, the door would be left open to the claimant interested only in occasional work and who was able to wait out the disqualification period.

Federal unemployment adjustment benefits

S. 1991 includes a provision calling for the payment of 26 weeks of extra benefits in both good times and bad to claimants having some specified amount of

previous labor market attachment. These added benefits have been termed Federal Unemployment Adjustment Benefits (FUAB). Subsequent to the passage of H.R. 15119 by the House, the Department of Labor has recommended an alternate scheme, should FUAB not be acceptable. This second proposal would serve as a "nudge factor" to states to extend the duration of regular benefits beyond one-half year by providing for federal sharing of the states' costs for such benefits. In addition, the federal government would pay the full cost of recession benefits instead of sharing the cost as proposed in H.R. 15119. California has had a program of extended duration benefits ever since 1959; only a handful of other states have similar provisions. Whenever unemployment in California is high-that is, when the unemployment rate of insured workers is at least six percent-California claimants are entitled to extra benefits of half again as much as their regular entitlement so that they will have additional time to look for work whenever jobs are hard to find. Because California's unemployment levels have been well above the national average in recent years, the extended duration program was in effect for several months each year until 1966. Part of the usual employment problem in California is seasonal in nature, and for some years the seasonal workers along with the others were drawing these extra benefits as a kind of bonus in months when they customarily would not have been at work anyway. Recognizing this partial misdirection of the program, the California Legislature amended the law in 1965. Under usual unemployment levels, claimants are required to have some reasonable amount of previous employment-20 weeks of work-in order to draw the added benefits. Whenever unemployment rises to a level above that for the preceding two years, however, all claimants can draw the added payments regardless of their previous employment records.

The California program would seem to come within the framework of unemployment insurance. Unemployment insurance is a wage-replacement program designed to help unemployed workers maintain themselves and their families during temporary periods of joblessness. "Temporary" can have a different meaning depending upon prevailing economic conditions. When times are good, most workers should be able to find jobs fairly quickly and a maximum duration of 26 weeks of benefits would seem adequate. In recession periods when jobs are more difficult to find, many unemployed workers need more time to effect their reemployment.

FUAB, in contrast, appears to offer a prolonging of payments to people who have moved outside the province of unemployment insurance; that is, beyond the period of temporary joblessness however it may be defined. It is suggested that people who are unable to compete in the job market and who are still out of work when their unemployment insurance benefits are exhausted are in need of a constructive program to treat the causes of their joblessness. Mere income maintenance is not the answer and might only postpone their rehabilitation.

Many federal programs have been developed to take care of the "hardcore" unemployed, including those provided under the Manpower Development and Training Act, Area Redevelopment Act, Public Works Acceleration Act, Trade Expansion Act, and Economic Opportunity Act. It would appear that extensions of these programs instead of longer income-maintenance payment periods would be the desirable course.

As for the alternate proposal, it well may be that the usual time for reemployment of some workers in some states extends beyond one-half a year during prosperous times. It would seem, however, that this is an individual state matter, to be determined and financed by the states. We would suggest that the federal monies would be put to better use in helping fund the cost of recession benefits.

The employer cost of S. 1991

The Administration's unemployment insurance proposals go beyond those contained in H.R. 15119. They not only call for federal tax increases in excess of those in the House bill but they also would require added state taxes to support the higher benefits, longer duration, and reduced eligibility and disqualification provisions that are specified. If S. 1991 were in full effect now, California employers' state and federal unemployment insurance taxes would average about 2.8 percent of their total payrolls. This percentage compares with an average combined tax rate on total payrolls of approximately 2.0 percent at the present time.

When the various payroll taxes are considered individually, their impact on costs is not so apparent. It must be remembered, however, that Social Security taxes also have risen markedly and that further substantial increases are scheduled. California employers' payroll taxes for these two social insurances represented 4.6 percent of the annual earnings of the average employee in 1965. By 1971 when S. 1991 would be in full effect, the payroll taxes would amount to 7.3 percent of the estimated annual earnings of the average California employee. In considering the current proposal, we would suggest that the Committee take into account the economic effect of these taxes on jobs.

There are two other financing items which should be mentioned. One concerns the Secretary of Labor's statement in his July 13, 1966 presentation before this Committee that benefits paid to claimants following a disqualifying act should not be charged against employers' experience-rating accounts. Perhaps this recommendation is appropriate, but what should be recognized is that such benefits must be charged against some account and must be financed accordingly. California law has the kind of noncharging provision that the Secretary suggests, but it also has a balancing account to pay for noncharges of this type as well as for other socialized costs of the program. Employers pay a uniform tax of one percent to fund this balancing account. The money to pay the benefits, in other words, must come from somewhere.

The second items has to do with interstate competition. It has been indicated that S. 1991 could have the effect of equalizing benefit costs among the states and thus easing any competition that may exist to keep unemployment insurance taxes low. There are a number of factors affecting the cost of state unemployment insurance programs, and the program provisions themselves are only one of them. California, for example, is a high-benefit-cost-and, therefore, high-tax-state. It is true that the program is more liberal than the average because of the long-time political and social philosophies that have prevailed in the state. However, the rate of insured unemployment is also an important cost factor, and California's insured unemployment rate has been well above that of most other states for the past several years. Moreover, wage rates exert a significant influence on benefit costs. Because benefits are wage-related, the higher the wages are the higher the benefit payments become. It would seem, on balance, that S. 1991 would exert comparatively little influence in equalizing costs among the states. Wage rates, unemployment rates, and other factors would appear to outweigh the influence of any leveling up of program provisions. Moreover, the "interstate competition" argument has yet to be validated. There is no evidence that unemployment insurance taxes affect companies' decisions to locate or expand operations in a state or to move out of a state. Company decisions of this nature are based upon a combination of many factors, among which unemployment insurance taxes play a comparatively negligible part.

The Summing Up

In assessing H.R. 15119, the California employers that I represent have concluded that the measure's provisions come within the scope of federal responsibility for the federal-state program of unemployment insurance. Furthermore, H.R. 15119 would substantially update the existing federal unemployment insurance law. Additional workers would be brought under the protection of the program. Financing of the federal-state employment security program would be improved. A permanent system for paying extra benefits during recessions would be established. Opportunity would be furnished the states for judicial review of the findings of the Department of Labor. At the same time, H.R. 15119 would leave with the states the latitude to develop and improve their unemployment insurance programs. The responsibility for determining benefit levels, duration of regular payments, the general terms under which benefits are granted, and the financing of the benefits would continue within the province of the states.

S. 1991, on the other hand, would substantially change the respective roles of the federal and state governments in the unemployment insurance program. It would put within the federal scope many important responsibilities that since the start of the program have been assigned the states.