money. With more and more States receiving grants, the drain on the Federal Treasury could run into hundreds of millions or even billions of dollars a year in years of high unemployment. Under such circumstances it would not be long before the Federal Government, to minimize the drain on its Treasury, would either raise its portion of the unemployment tax about 0.3 percent, or set the minimum employer contributions about 1.2 percent or, in all likelihood, do both. The entire force of events would be in the direction of very high and nearly uniform tax rates for all employers. To all intents and purposes, the experience rating system as we know it today would no longer exist. Experience rating systems have been in effect in our Pacific States, and I believe in fact in all States, for many years. Usually several tax schedules involving different levels of rates are provided. The lower schedules which go into effect when the State reserve is in a favorable position permit rates as low as 0.1 or 0.2 percent for employers having a good experience rating and high reserves, and even no tax at all in several States when all conditions are favorable. Experience rating has several important advantages. In the first place, it has provided an incentive for employers to stabilize their employment so as to take advantage of ensuing lower rates. This, with careful planning, is possible to do in our business and in many other industries, particularly in the realm of technological change. For example, if new inventions and machines are coming along there is usually time to plan for minimizing possible unemployment. In our business for many years we have been converting from manual to dial operation thereby reducing the immediate need for telephone operators at some locations. It is possible to minimize the resulting displacement by careful management of the force in the preparatory 2- or 3-year period. Overtime is utilized. Former employees are canvassed to see if they will return for brief periods. Finally alternative assignments in other departments or localities are offered. As a result of all this, very few regular employees, if any, are laid off at the time that the dial is introduced. I personally have anticipated such procedures in my company and know they work. Other Bell System companies have done the same thing. Another advantage of the experience rating system is the way in which it has provided a practical method of controlling abuses. The practice in California, and in many other States, is to forward a copy of the application form for benefits to the former employer. This provides the employer with an opportunity to protest if he believes the claim is unwarranted. Although most applications for unemployment insurance are proper, there are always some who attempt to obtain benefits through misunderstanding or unfairly. In instances where the employer objects and states his reasons why, the State department of employment is then able to make a more informed decision as to the propriety of the claim. The rights of the applicant are protected because if the individual disagrees with the department's decision he is entitled to a hearing before a referee and later on, if necessary, before an appeals board. If the experience rating system is done away with, there will be little or no incentive for employers to go through the work and cost of providing the department of employment with full information on claims. In my opinion, doing away with experience rating will, through the loss of these two advantages, increase the costs of the unemploymentinsurance program to a very considerable degree. Incidentally, in all this process we seem to be losing sight of one of the original great objectives of the system, which was the prevention of unemployment and stabilization thereof. This was emphasized in the report of the Committee on Economic Security, House Document No. 81, 74th Congress, 1st session, 18-19 (1935), in President Roosevelt's message transmitting report on economic security (H. Doc. No. 81, 74th Cong., 1st sess.), and in Senator La Follette's statement printed in the Congressional Record (vol. 79, pt. 9, pp. 9359– 9361, June 15, 1935). The advantage of an experience rating system was brought out in these reports and statements. For the committee's convenience, I am attaching the first few paragraphs of Senator La Follette's statement. Incidentally, I have read the complete statement and there is nothing it it that would go against the first few paragraphs. To show how the experience rating works in my company, I have prepared an exhibit (exhibit A), which summarizes the result of the company's experience with the unemployment insurance system as administered in California over the past 15 years. In reviewing this exhibit, you will note that the amounts that the Pacific Co. has paid into the pool fund in California have far exceeded the benefits paid on account of Pacific Co. ex-employees. In this period the contributions were $21.3 million, the charges $4.9 million, or a net excess of contributions of some $16.4 million. (If pro rata allowance is made for benefit payments on account of voluntary quits, separations for misconduct and benefits in excess of 18 weeks, and after prorate of miscellaneous revenue credits, none of which are charged to the individual employer's account, this figure becomes $13 million.) Our average rate of contribution over the period was 0.92 percent of taxable payroll. If our percentage rate had been set so as to exactly take care of benefit costs attributable to us, our rate over the 15-year period would have averaged much lower (0.37 percent as compared to 0.92 percent). As I said before, much of this favorable experience and low benefit costs for Pacific Telephone did not just happen but were the result of careful planning to reduce technological unemployment and the improper claims for benefits. I think it is fair to say we would not have spent some of the money that we did for these purposes had we not expected that the experience rating system would continue. If this bill becomes law, the advantages accruing to Pacific and the other Bell System telephone companies through careful building up of a favorable reserve over this period would be wiped out within a few years and we estimate that our unemployment taxes will be more than doubled. Most other Bell System telephone companies-in fact all of them— would be in a similar position. I submit that this is not equitable either for the companies or the millions of users of telephone service who must ultimately foot the bill. In summary I believe the proposed bill would have far-reaching effects on our whole unemployment insurance system, some of which at least I cannot fully foresee or understand. It would greatly weaken if not destroy the experience rating system with its present attendant advantages. Incentive of employers to stabilize employment would be undermined. It would raise benefit levels and costs in amounts difficult to judge but in any event the increase would be very great. Incidentally, I have just received an estimate over the weekend here in Washington of what it would mean in California through informal statements made by the State department in California. The total employment benefits in California according to their estimate would be increased about 55 percent. I believe those figures are being made available to the Labor Department here, if your honorable committee would wish to check them. It would encourage more spending on the part of the States. Efforts to keep the State reserves on a sound basis are liable to be replaced by trends toward lowered and unsound reserve situations. The demand for Federal grants could run to hundreds of millions if not billions annually. Also one of the original purposes, to encourage steady employment, may be hindered rather than helped. The effects of this bill on business generally and on the economy as a whole have been very difficult for us to evaluate with any degree of precision. As far as we know, through objective study of pertinent material that probably could be developed from the files of the State unemployment administrators has not been made. We believe that such a study would demonstrate that the approach taken by this bill is unwise. In view of this and the fact that the bill would represent an irreversible action, the Bell System companies strongly recommended that no affirmative action be taken on this bill. The CHAIRMAN. Mr. Ireland, without objection the material appended to your statement will be included at this point in the record. (The material referred to follows:) EXCERPT FROM STATEMENT BY SENATOR LA FOLLETTE OF WISCONSIN PRINTED IN THE CONGRESSIONAL RECORD, VOLUME 79, PART 9, PAGES 9359-61, JUNE 15, 1935 "The case for permitting States to adopt the separate reserve account type of unemployment compensation law and for giving credit to employers who have regularized employment. "Why the finance committee amendment on additional credits to employers who have regularized their employment should be adopted. "(1) Prevention of unemployment is very much more important than compensation for unemployment. Unemployment compensation can give unemployed workers only a partial wage and for a limited period. None of the unemployment compensation laws enacted to date gives compensation of more than 50 percent of the prior wages, and in all of them the duration of payments is strictly limited. Unemployment compensation is distinctly better than nothing, but so long as at least half-time work is provided the employees are better off if they are retained in employment than if they are laid off. (Most employees actually prefer earning less money and being kept on the payroll than being severed therefrom and drawing slightly more compensation for a limited period.) "(2) Under the finance committee amendment, unemployment compensation will tend to stimulate the regularization of employment, without which the re verse effect may result. While employers must pay the same rate of contributions, whether they have much or little unemployment, there is no incentive at all to reduce unemployment. When orders slacken, the natural thing for them to do is to discharge employees who are no longer needed. Where employers can save money, on the other hand, through regularizing their employment, they may be expected to do everything that they can do to reduce their costs. When orders slacken, instead of discharging some employees, they will have a strong incentive to reduce hours of labor and to spread their work among all of their employees so that they do not have to pay compensation from their own accounts to some of these employees. Likewise, they will try to eliminate seasonal and other irregularities as best they can. The extent to which they can do so will vary with different industries, but under the stimulus of the possibility of reducing rates of contribution, it is to be expected that employers will do very much more toward regularizing employment than they have done heretofore. "(3) These provisions carry out the oft-expressed wish of the President that unemployment compensation should promote the regularization of employment. Upon this point the President stated in his message of January 17, 1935, which dealt exclusively with the subject of social security: 'An unemployment compensation system should be constructed in such a way as to afford every practicable aid and incentive toward the larger purpose of employment stabilization. This can be helped by the intelligent planning of both public and private employment. * * * Moreover, in order to encourage the stabilization of private employment, Federal legislation should not foreclose the States from establishing means for inducing industries to afford an even greater stabilization of employment.' "The same thought was reiterated by the President in his fireside address on May 5. The views of the President on this subject are in accord with sound public policy and accurately reflect the sentiment of the country." THE PACIFIC TELEPHONE & TELEGRAPH Co. EXHIBIT A.-Summary of unemployment insurance reserve account and contribution rates for unemployment insurance for State of California 1 Data for preceding year ending June 30. 2 Average yearly payroll over a preceding 3-year period. 14-year average, 0.92 percent; 15-year average, 0.95 percent (estimated), not available. 4 This figure becomes 0.37 percent after giving effect to voluntary quits, separations for misconduct, and benefits in excess of 18 weeks, and after prorate of miscellaneous revenue credits, none of which are charged or credited to the individual employer's account. The CHAIRMAN. Are there any questions of Mr. Ireland? Mr. CURTIS. Mr. Ireland, I appreciate your statement very much. I wish that my colleagues who proposed these bills were present because there has been some discussion back and forth as to whether or not the bills as written would from a practical standpoint destroy the experience rating system. I have been one of those who have felt that it would and I think your explanation of why you think it would deserves a lot of thought. I wish they had an opportunity to examine you on that, because I think it is important. I would say this, though: When Mr. Meany testified and others in labor they expressed a disapproval of the whole system and although Mr. Meany did not actually say so, I think he almost said under my examination, and at least his statement said, that he would like to see the experience system eliminated. And therefore I suspect that although he maintains that the bills as written would not eliminate the experience rating system, I think knowing that he would like to see them eliminated should put us on our guard. I was happy too, I want to state, to see that you gave such a splendid statement as to how the experience rating system provides an incentive for employers to stabilize their employment, because just through testimony heard before you took the stand from the CIOAFL leaders, for whom I have a high regard and these other leaders who object to experience rating, they never have referred to the fact and like to disregard this element that you point out, that it does encourage employers to stabilize their employment, which was one of the original objectives of the unemployment insurance program. I have made this statement, and I think it is what this committee probably is going to have to dig into if it really wants to determine what to do in this area to find out just how much the experience ratings throughout the States have been lowered as a result of industry actually stabilizing their employment and what might have been the reduction of those rates because of abuses, such as some of the labor leaders have suggested exist, in putting incentive on industry to keep them low. The second point that I want to thank you for bringing out clearly is the practical method controlling abuses or policing the system. Mr. Meany pointed that out as one of the bad things about it. I pointed it out, and I know you have done it much better because you are doing so on the basis of some actual experience, as one of the practical methods of controlling the abuses. I wish if the labor leaders are sincere in their presentation they would come forward with a documentation of where they think there are abuses and where an employee who is claiming unemployment insurance isn't getting a fair shake under the system by which he can present his claim. I notice in here you point out there is a right of appeal. Who pays the expenses of the litigation in the event that the employee carries it on up? Is that done by the State? Mr. IRELAND. It is borne by the State; yes, sir. Mr. CURTIS. Does he have access to counsel ? Mr. IRELAND. He has access to counsel or his union can protect him. Mr. CURTIS. That is what I thought was the procedure in most |