Mr. O'CONNELL. I don't recall it specifically but I accept it. Mr. KARSTEN. We have a paradox, apparently, of the Secretary recommending additional standards beyond the one standard that you mentioned, standards dealing with terms of benefits, duration, and amounts. I just wondered, Mr. Chairman, if Mr. O'Connell could tell us what he had in mind at that time. Mr. O'CONNELL. I don't think I could tell you specifically what the Secretary had in mind. The statement indicates, as I heard it, that he thinks the Federal-State unemployment system should be thoroughly reviewed by Congress and the administration. Mr. KARSTEN. No. I think he was very definite on that. Mr. Chairman, I would like to also request that we ask Mr. Mitchell to furnish us with an explanation as to what he meant in reference to that public statement because it apparently is at quite a variance with the testimony we received this morning. The CHAIRMAN. Without objection, that statement will appear at this point in the record. (The information follows:). STATEMENT OF POSITION FAVORING FEDERAL ACTION TO IMPROVE UNEMPLOYMENT BENEFITS, FEDERAL ADVISORY COUNCIL, DECEMBER 2-3, 1958 On December 2, the Federal Advisory Council reached the following consensus: Whatever Federal standards can be agreed upon should be implemented by methods already established in the existing Federal-State employment security legislation; namely, the use of the taxing power and offset. There followed a thorough discussion by the Council of the several standards proposed by a majority of the Legislative Review Committee. It was agreed that the public members would accept the responsibility for preparing a revised set of recommendations. The public members met immediately following the recess of the Council on the evening of December 2 and prepared the following statement: After careful review and appraisal of the data presented to the Council and after discussion of the points of view presented in the reports during the Council deliberations, the public members reached the conclusion that the recommendations given below should be made to the Secretary. When presented to the Council the labor members joined in unanimous support of the recommendations of the public members. A. RECOMMENDATIONS (1) The great majority of covered workers, as recommended by the President, should be eligible to receive as unemployment benefits at least one-half of their regular weekly earnings. In order that the great majority may get this amount, the States will need to provide for a maximum weekly benefit amount equal to no less than 66% percent of the statewide covered average weekly, wage. It is recommended that this provision be implemented in three stages; for the first 2 years following the effective date of the provision the maximum weekly benefit should not be less than 50 percent of the average weekly wages of workers in the State covered by the State unemployment insurance law; for the next 2 years not less than 60 percent; and after that not less than 66% percent. (2) Unemployment benefits for at least 30 weeks during a 1-year period should be uniformly provided for all claimants who remain unemployed for that long and are otherwise eligible for benefits. (3) No State should require more than 20 weeks of employment during the claimant's qualifying year for eligibility for benefits. It is recognized that evidence of substantial attachment to the labor force should be required to justify the duration provision proposed. It is believed that 20 weeks is an adequate test. We, therefore, recommend that not more than 20 weeks of work should be required as an eligibility test. (4) The offset against the Federal tax should be reduced from 2.7 percent to 1.7 percent for employers in those States which do not meet the above-men tioned conditions. As in the past, those States that meet the Federal conditions shall continue to have an offset of 2.7 percent. Those States which fail to comply shall be permitted an offset of 1.7 percent. It is not the intention of this recommendation to raise additional revenues, but rather to remedy serious deficiencies in the present system. However, in the event that any revenues do accrue because of failure of a State or States to meet Federal conditions, these funds should be added to the amount of the Federal loan fund. B. PUBLIC RECOGNITION OF INADEQUACIES IN THE PRESENT SYSTEM In 1954, the President recognized the need for improvements in the program and since then has each year urged in his economic report to the Congress that the States (1) increase their maximum benefit amounts so that the great majority of covered workers will be eligible for at least half of their regular weekly earnings, and (2) provide for 26 weeks of benefits for all eligible claimants who remain unemployed that long. The recession has focused attention on the shortcomings on the unemployment insurance system. Congress has already recognized these shortcomings of the program with respect to duration of benefits, and enacted the Temporary Unemployment Compensation Act in 1958, which provided for the financing of 50 percent longer duration of benefits through an appropriation of $665 million. The Vice President of the United States, in a recent speech at Harvard, also suggested that steps be taken to consolidate on a permanent basis the improvements in duration of benefits which resulted from the enactment of the temporary unemployment compensation program in 1958, and called attention to the need for improvements in benefit amounts. In addition, the former Chairman of the Council of Economic Advisers, Dr. Arthur F. Burns, in a speech delivered this month to the Joint Council on Economic Education, declared that "the most useful step that we can take in the near future" to strengthen the automatic stabilizers of the economy "is to liberalize our employment insurance system **It would hardly be wise to wait for another recession before we again tackle the problem of unemployment insurance *** Now that our economy is once more expanding, we are in a position to proced deliberately and to carry out permanent improvements in unemployment insurance, not only with a view to mitigating individual hardships, but also with the objective of increasing the resistance of our economy to a future recession." C. CONSIDERATIONS SUPPORTING THE RECOMMENDATIONS 1. Benefit amounts In 1957, the average weekly benefit represented only 34.8 percent of average weekly wages for the country as a whole, as compared with 41.7 percent in 1939. The fall in the ratio was due to a lag in increases in benefits as compared with increases in wages. This ratio has been practically static since 1952' because benefit increases have not kept pace with increases in weekly earnings in the country as a whole. Except in States basing benefits on annual earnings, the benefit formulas in the State laws provide for weekly benefit amounts that are equal to at least 50 percent of regular earnings in most cases. However, this objective has been thwarted by the provisions which limit benefits by fixed benefit amounts. Maximum benefit amounts are still so low that in April-June 1958 about onehalf of the claimants in the country as a whole were at the maximum, while in three States (Illinois, Louisiana, and Ohio) the proportion at the maximum was 80 percent or more.3 Almost all of those who receive the maximum amount prescribed by the State laws are getting less than one-half their weekly wages in benefits. It will be recalled that the President recommended that the maximum be high enough that the great majority of covered workers are eligible for at least one-half their wages. To accomplish this goal for the great majority, the maximum that an employed worker may receive must be substantially higher than one-half the covered State average weekly wage. This is because in a normal distribution of wages, one-half will be earning 50 percent or less of the average earnings of Table S-3, "Adequacy of Benefits." Louisiana increased its maximum from $28 to $35 in July 1958. covered workers and one-half will be earning more than 50 percent. But in only six States-Hawaii, Idaho, Mississippi, North Carolina, Utah, and Wyoming, with 4 percent of the covered workers-does the basic maximum weekly benefit amount represent 50 percent or more of the average weekly wages of covered workers, while the maximum represents less than 40 percent of average wages in 13 States with 34 percent of the covered workers.* Nor has there been much improvement since the President began recommending in 1954 that benefits be improved. At that time, 3 States, with 3 percent of the covered workers, had maximums representing 50 percent or more of average covered wages and 19 with 37.3 percent of the covered workers had maximums representing less than 40 percent. It is true that practically all the States have increased their maximums one or more times since 1954. However, wages have also been increasing during this period. As a result, in 14 of the 46 States that have increased their basic maximums at all during the last 5 years, increases in maximums have not kept pace with increases in weekly wages." Studies of the income and expenditures of beneficiaries made in six States have shown that the benefit amounts are inadequate. The average weekly benefit paid to the unemployed head of a four-person family in these studies represented only from 37.5 to 47.5 percent of weekly expenditures during unemployment. In fact, the family's weekly expenditures for the basic essentials of food, shelter, utilities, and medical care, let alone such other necessary expenses as household operation and transportation were not covered by unemployment benefits.' Yet, it is significant that most of these individuals (about three-fourths or more in five of the six studies) were entitled to the maximum weekly benefit amount provided under State law. That benefit should be at least one-half of regular earnings is a commonly accepted objective. This objective was largely accomplished in the original laws of the States. Although the beneficiary studies made by the six States referred to earlier show that claimants spend much more than 50 percent of their former earnings to maintain themselves and their families during unemployment, we realize that much more research is required before a more appropriate percentage can be determined. In a system that determines benefits on the basis of wage loss, theoretically there should be no maximum. We recognize, however, that if there were no maximum above a certain point, part of the funds would be diverted to paying very high benefits to a limited number of extremely well-paid employees. This should be avoided. The maximum should be high enough, on the other hand, so that the weekly benefit is related to the worker's wage loss. Certainly, when 80 percent of claimants receive identical benefits, i.e., the maximum allowed, as occurs in several States, a wage-related benefit system has practically ceased to exist and the State has, in effect, a flat benefit system. The President has recommended that benefit maximums be high enough so that the great majority of workers will be entitled to at least one-half their regular earnings, and we accept this principle. Most of the period in which the unemployment insurance program has operated has been characterized by steadily increasing wages. In most instances, increases in dollar maximums for unemployment benefits have lagged far behind wage increases. This, in fact, is largely responsible for the low benefits in relation to wages now received by many workers. We therefore believe that benefit maximums should automatically increase (or decrease) with increases (or decreases) in prevailing wage levels. We therefore recommend a benefit maximum in terms of statewide average weekly wages of covered workers. Two StatesUtah and Wyoming, have already written this principle into their laws. We believe that it will be necessary for the maximum to be set at two-thirds of average weekly wages in the State in order for the great majority to receive at least half their regular earnings. This is corroborated by a composite of sample studies in the States of Michigan, New Jersey, New York, and Wisconsin, which showed that if the maximum were set at 67 percent of the statewide average, from 6 to 29 percent of the beneficiaries in these States would still receive less than onehalf their former earnings. The average for all four State studies was 17 percent. Table B-2, "Adequacy of Benefits." Table B-3, "Adequacy of Benefits," and table 2, "Summary Tables for Evaluation of State Unemployment Insurance Coverage and Benefit Provisions." Pennsylvania, Florida, South Carolina, New York, Oregon, and Missouri. However, we recognize that to achieve this recommendation would require a drastic increase in the existing benefit maximums because these maximums have lagged so far behind wage increases. We therefore recommend that the States be allowed to meet the recommendation in three stages. Under this proposal, the States would be permitted to have a benefit maximum equal to not less than 50 percent of average wages for the 2 years following the effective date of the provision, and not less than 60 percent for the next 2 years. At the end of that time, it would be necessary that they go to two-thirds of average weekly wages in order to achieve the objective of providing 50 percent of average weekly wages to the great majority of the unemployed." We recognized that the seven States using an annual earnings formula for determining the weekly benefit amount could not without changing their formula meet the recommended condition, since it is based on a relationship between weekly benefits and weekly wages." This we regard as no serious argument against their proposals. The Council on more than one occasion has drawn attention to the undesirability of this method of determining eligibility and benefit amount. An annual earnings formula cannot even approximate a consistent relationship between weekly benefits and weekly earnings for large numbers of workers. For example, earnings of $800 in a base year can represent 20 weeks of work at $40, or eight weeks at $100. 10 While agreeing with the principle that it is undesirable that a worker should be better off on benefits (which are nontaxable) than when drawing wages (which are taxable), we conclude that so long as benefits are equal to only 50 percent of earnings, a sizable differential between benefits and take-home pay is assured. Even in those States which grant dependents' benefits, the benefit of a worker with three dependents never exceeds 65 percent of net wages after withholding taxes and in most such States is below 60 percent. This should provide an ample differential between benefits and wages, and is not likely to decrease the incentive to work. Furthermore, analysis of withholding tax tables indicated that differentials between gross and take-home pay are not large enough as between single persons and four-person family heads to justify the administrative expenses, the difficulties and inequities that would be involved in determining benefits on the basis of take-home pay. 2. Benefit duration The clearest indication that the duration of benefits provided in the State laws is inadequate is that during the first 10 months of 1958, after an average duration of about 21 weeks, over 2,200,000 individuals were still out of work after they exhausted their regular unemployment insurance benefits. Even more significantly, in the years such as 1956-57, both of which were characterized by high employment (except in the latter part of 1957), the number of exhaustions exceeded a million. The averag eduration of benefits of those who exhausted benefits in these years was about 20 weeks." It should be emphasized that these workers were able and willing to work, but suitable work was not available to them. Not only were the absolute numbers exhausing benefits significant, but also the proportion exhausting. About one-fourth of those who drew any benefits (22.1 percent in 1956, 23.5 percent in 1957, and 25.7 percent during the 12 months ending on June 30, 1958) exhausted them.12 This ratio for the United States hides much higher ratios of exhaustions in some States. For example, in 1956, when exhaustions were lowest of the 3 years cited, 17 States had ratios of exhaustions exceeding 30 percent ranging up to a peak of 41.3 percent in Louisiana and 41.1 percent in Florida." Since the standard would establish * A definition of weekly earnings would be required. a floor, the weekly wage in those States determining benefits by high quarter earnings should be defined as not less than one-thirteenth of the wages in that quarter. Such a definition assumes that the individual has worked full time throughout his high quarter. This is a conservation assumption. Most States with high quarter formulas assume some unemploy ment in the high quarter and use a more liberal fraction. They could continue to do so under the suggested definition. Those States that determine benefits on the basis of average weekly earnings would be permitted to continue to do so, and the definition should provide for averaging only those weeks of earnings that exceed a certain amount that will assure substantial employment in that week, say $15. See table B-1, "Adequacy of Benefits." See table B-12, “Adequacy of Benefits." Table S-6, "Adequacy of Benefits." 12 Table D-4 and S-8, "Adequacy of Benefits." 13 Table S-8, "Adequacy of Benefits." 39678-59-5 It is true that in practically every State the duration of benefits has been increased significantly from the durations provided at the beginning of the unemployment insurance program. The original duration provisions were admittedly inadequate, but were limited because of the uncertaintly as to what could be provided with a 2.7-percent payroll tax. The major reason for the high rates of exhaustions is the limitation on the duration of benefits. For example, in New York and New Hampshire, both with ȧ uniform potential duration of 26 weeks, the ratio of exhaustions in 1956 was 11.2 and 12.8 percent, respectively. Only five other States have a uniform potential duration of 26 weeks or more. Twenty-four States have variable duration with a maximum of 26 weeks and 2 have slightly higher. The other States have variable duration of less than 26 weeks ranging down to a maximum of 16 weeks in Florida." The average potential duration of benefits of all claimants was 23.4 weeks in 1957, slightly higher than for persons exhausting benefits. dividual States in 1957, the average potential duration ranged from 14.3 weeks in Florida to 30 weeks in Pennsylvania. Average potential duration for the country as a whole had improved by only 1.4 weeks between 1952 and 1957. Since the President first recommended potential uniform duration of 26 weeks, there has been a net gain of only three States that meet this goal. In in It should be clear, of course, that the requirement of 30 weeks' maximum duration of benefits assumes continued involuntary unemployment for that time for each individual. The benefits stop for those who fail to qualify because they are not able and available for work or refuse suitable work. In arriving at our recommendation for duration of benefits for 30 weeks, we started from the premise that the precise number of weeks must ultimately be determined in the light of prevailing views of the role of unemployment insurance in contemporary society on the one hand, and by the actual patterns of employment and unemployment, on the other. We believe that it is the function of unemployment insurance to provide income for relatively short periods of involuntary unemployment which may affect the individual who is normally a member of the labor market. We also attach importance to the role of the system in maintaining purchasing power in the economy as a whole during periods of economic readjustment. The appropriate number of weeks which should be available to all otherwise eligible workers must reflect prevailing employment and unemployment patterns. If experience showed that only exceptionally were workers unemployed for more than, say 20 weeks, there would be a strong case for selecting this figure as the minimum duration standard. Actually, available data indicate that the normal worker is likely to suffer unemployment of longer duration than this at some time or other. In the years 1954-56, when over a million workers exhausted benefits annually, the average duration of those exhausting was slightly more than 20 weeks." Studies in 16 States of persons who exhausted their benefits in these years showed that from 23 to 57 percent of the exhaustees were still unemployed 4 months after exhaustion of benefits." Adding the unemployment before and after exhaustion, many of these had undoubtedly been unemployed 37 weeks or more. The President has recommended a uniform duration of 26 weeks. While representing a substantial improvement over the present provisions, even this seems too low to permit the system to attain its objectives in the case of sizable number of workers. In New York State, which proves 25 weeks' uniform duration, the exhaustee study referred to above showed that 27 percent of those who had exhausted benefits were still unemployed 4 months later, or for a total of 43 weeks. The temporary unemployment compensation program enacted in 1958 has demonstrated that a longer duration of benefits than States now provide is clearly needed in a recession. Through October, a total of 1,172,000 who had exhausted their regular benefits had drawn temporary unemployment compensation for 1 or more weeks. Up to that time, 400,000 had exhausted their temporary unemployment compensation benefits. Since persons exhausting State benefits had drawn an average of 21.5 weeks of benefits, it can be assumed that those exhausting temporary unemployment compensation had drawn 11 additional weeks of benefits on the average, for a total of over 32 weeks. 14 Table D-2, "Adequacy of Benefits." 15 Table S-6, "Adequacy of Benefits." 16 Table E-1, "Adequacy of Benefits." |