insurance program will greatly increase the effectiveness of that program in preventing dependency. The Social Security program has been applicable to em. ployers of only one employee since 1937, and to such groups as agricultural employees and employees of nonprofit organizations since 1950. On the basis of our experience in administering coverage provisions which are generally broader than those recommended for the unemployment insurance program, we believe that the expanded unemployment insurance coverage proposed in H.R. 12625 can be successfully administered.

We would also like to comment specifically on the provisions of H.R. 12625 which would increase the taxable wage base under the Federal Unemployment Tax Act from $3,000 a year to $4,800, effective January 1, 1972, and from $4,800 to $6,000, effective January 1, 1974.

Beginning with the 1939 Social Security Amendments, the contributions and benefits base for purposes of both the Social Security program and the Federal unemployment insurance program was $3,000. In 1940, the $3,000 limit covered about 92 percent of the total wages of those workers covered under Social Security and 93 percent of the total wages of those workers covered under unemployment insurance.

Over the years, the Social Security contributions and benefits base has been periodically increased as earnings levels rose, until it is now $7,800. The wage base under the Federal unemployment insurance program has remained at $3,000. About 82 percent of total earnings in covered work are now subject to Social Security contributions; only about 46 percent of total earnings in work covered by the Federal unemployment insurance program are taxable. The higher tax base proposed for the unemployment insurance program would not only improve the ability of the States to finance the program, but would broaden employment opportunities for lower-wage workers by reducing the employer's disincentive to the hiring of such workers arising from the fact that all or a substantially higher proportion of their wages are now taxed. Similarly, an increase in the tax base would lessen the employer's incentive to resort to overtime rather than add workers in order to save taxes. Finally, the higher tax base, by reducing overall benefit costs to a lower percentage of taxable wages, would allow more room for tax rates to more accurately reflect employer experience. Our experience with the increases from time to time in the Social Security contributions and benefits base clearly confirms the desirability of this recommendation. Other provisions of H.R. 12625 would also make significant improvements in the unemployment insurance program. For example, the proposal to automatically extend for up to 13 weeks the length of time benefits are paid in all States when the National unemployment rate of those covered by unemployment insurance is 4.5 percent or more for three consecutive months, while continuing the principle of compensating unemployment for a limited time, would introduce a flexibility much needed in times of recession. By Federal legislation in 1958 and 1961, periods of extended unemployment benefit payments were provided temporarily but, because of unavoidable lag in the effectuating changes, many workers and their families suffered total loss of income and some required public assistance-a situation that would be minimized under the present proposal. Also, the extended payments would of course tend to buffer the development of economic recessions.

In summary, on the basis of our experience in administering the broadcoverage Social Security program, in which the benefit levels and the amount of earnings covered have from time to time been increased to make the protection more universal and more relevant to conditions in an expanding and ever more complicated economy, the proposals in H.R. 12625 seam very desirable and quite administrable. Extending and improving the unemployment insurance program within its present framework as proposed in the bill would increase its relevance to the social need to which the program is directed, and would improve its efficiency in performing its main function of providing cash income for a limited time for generally experienced and able workers who are clearly a part of the regular labor force but temporarily out of a job. We therefore recommend that the bill be enacted.

We are advised by the Bureau of the Budget that enactment of this bill would be in accord with the program of the President.

Sincerely,

ROBERT H. FINCH, Secretary.

Mr. WATTS. We have with us this morning the Honorable George P. Shultz, Secretary of Labor; the Honorable Murray L. Weidenbaum, Assistant Secretary for Economic Policy, Department of the Treasury; and the Honorable Walter H. Hamilton, Deputy Assistant Secretary for Domestic Business Policy, Department of Commerce. Without objection, we will hear from all three of these gentlemen in their presentations before we interrogate any of them.

Mr. Secretary, we all welcome you to the committee this morning. We are pleased to have you with us and you are recognized, sir.

STATEMENT OF HON. GEORGE P. SHULTZ, SECRETARY OF LABOR; ACCOMPANIED BY ARNOLD R. WEBER, ASSISTANT SECRETARY FOR MANPOWER

Secretary SHULTZ. Thank you, Mr. Chairman.

Mr. Chairman, I also have with me Arnold R. Weber, who is Assistant Secretary for Manpower in the Department of Labor, under whose division the unemployment insurance work in the Department takes place. He is here because he is so smart and he knows so much about the topic that I thought it would be well to have him around.

Mr. WATTS. Well, it is fine to have a group of smart people around. Secretary SHULTZ. Yes. Well, one of us, anyway.

Mr. WATTS. We welcome you, Mr. Weber.

Secretary SHULTZ. Mr. Chairman and members of the committee: I am pleased to appear before your committee to support H.R. 12625, Employment Security Amendments of 1969, to improve and strengthen unemployment insurance. As President Nixon stated in his special message to the Congress concerning unemployment insurance:

The best time to strengthen our unemployment insurance system is during a period of relatively full employment.

Unemployment insurance is a major factor in stabilizing our economy, and an important aspect of manpower policy. It is the primary source of financial support during unemployment for wage earners who normally are employed. In an economy made up principally of wage earners over 80 percent of our labor force works for someone else the individual hazards of unemployment may be aggregated to pose a threat to the whole society. Therefore, everyone-workers, both employed and unemployed, employers, and the general public-benefits from unemployment insurance and would gain from an improved program.

By providing income maintenance as an earned right when the individual is losing wages, rather than as a handout based on need after he has exhausted his savings and liquidated his assets, the program maintains the individual's dignity and his position as a member of the labor force.

Responsibility for the program is shared by the Federal Government and the States. While the Federal Government establishes broad guidelines, the States determine the specifics of the program, and the dayto-day administration.

After more than 30 years experience with this Federal-State program, I believe that both the Federal and the State partners will agree that the system works well. As with all human institutions, it has its

areas of difficulty and its problems. But for 30 years, benefits have been paid to unemployed workers throughout the United States as a matter of earned right. About $47 billion has been added to the incomes of the individual families experiencing the misfortune of involuntary unemployment. This $47 billion in "high velocity dollars"-dollars which are quickly spent and therefore have a multiplier effect on the economy-has been added to the aggregate purchasing power of the country, automatically increasing as unemployment rises and decreasing in periods of high employment.

Even during the current period of high employment, experienced workers may find themselves involuntarily unemployed. In comparison with other years the monthly insured unemployment rate was very low during the first 6 months of 1969, ranging from 3 percent down to 1.7 percent, in the various States; yet over 2.2 million different individuals drew over $1.3 billion in unemployment benefits during that period.

Although the value of our unemployment compensation system, both in terms of benefits to the individual worker and contributions to the economy as a whole, has been amply demonstrated, the system does have weaknesses which we should move to correct now.

While 57.7 million workers are in jobs covered by unemployment insurance, another 16.6 million workers are in jobs that are not protected.

When a high unemployment rate continues, too many of the unemployed exhaust their benefit rights before they have found a new job.

Some States pay benefits to workers who have not demonstrated a truly significant past attachment to the labor force.

Some States-about half-suspend an unemployed worker's right to benefits if he tries to improve his employability through training.

Other provisions in a minority of State laws have led to general criticism of the program.

Retention of an obsolete limit on the amount of a worker's wages which are taxable has not only resulted in inadequate funds but even more significantly has distorted the incidence of the tax load, eroded experience-rating formulae, and negated the concepts on which the tax structure was based.

For a large number of the insured workers the benefits provided fall short of meeting the stated objectives of replacing 50 percent of lost wages for most workers.

This committee is fully aware of the shortcomings of the present system. In 1965 and 1966 a substantial amount of your time was dedevoted to consideration of these same general areas of weakness, and development of an unemployment insurance improvement bill, H.R.

15119.

We could have picked up that bill and recommended it to this Congress. While H.R. 15119 was the starting point for H.R. 12625, our evaluation persuaded us that some changes were desirable.

We have prepared a detailed explanation of the many changes H.R. 12625 would make in existing Federal unemployment insurance statutes, and why we believe each of these changes would improve the program. I should like to put this statement in the record, and devote

my comments here to a discussion of the major features of the bill. I shall, of course, be glad to answer your questions on any provision. Mr. BOGGS (presiding). Without objection, the statement will be incorporated in the record.

Secretary SHULTZ. Thank you, sir.
(The statement referred to follows:)

DETAILED EXPLANATION OF AND SUPPORT FOR H.R. 12625

INTRODUCTION

Based on the belief that the best time to mend the roof is when the sun is shining, H.R. 12625 is designed to strengthen and improve the economy's basic defense against unemployment at a time when unemployment is at an unprecedented low. The bill contains many details and many technical provisions, organized into three titles: Title I-Unemployment Compensation Amendments, Title II-Federal-State Extended Unemployment Compensation Program, and Title III-Financing Provisions. With the changes that these titles would make the Federal-State unemployment insurance system would be both strengthened and improved and would assure better protection against the worst effects of unemployment.

TITLE I-UNEMPLOYMENT COMPENSATION AMENDMENTS

Title I would amend Federal unemployment compensation statutes in four separate respects. It would extend the program's protection to about % of the presently excluded jobs, add some additional requirements to the existing require ments a State law must meet in order to be certified for tax offset credit, provide for judicial review of a Secretary's action adverse to a State, and provide for improving administration of the program.

Part A-Coverage

Unemployment insurance should, to the maximum extent possible, protect all who work for others. Present exclusions leave some individuals completely outside the system, and reduce the amount of protection available to others who work in both covered and uncovered employment. Effective January 1, 1972, Part A would extend the protection of unemployment compensation to about 5.3 million jobs in the following six categories:

1. Employers who pay $300 or more in wages in a calendar quarter, but do not have four workers in 20 calendar weeks in a year.

2. Certain agent-drivers and salesmen who are not employees under common law, but are defined as employees for Old Age, Survivors, Disability and Health Insurance (OASDHI) purposes (i.e. "Social Security”).

3. Farm employers who employ four hired workers in 20 calendar weeks in a year.

4. Agricultural processing and similar borderline activities not considered agricultural labor for OASDHI.

5. Most excluded nonprofit organizations which have four employees in 20 calendar weeks of a year, with some exceptions such as churches and elementary and secondary schools.

The first four categories would be made subject to the tax imposed by the Federal Unemployment Tax Act (FUTA). Coverage of presently excluded nonprofit organizations and of State hospitals and State institutions of higher education would be achieved by making State protection for such workers a condition for tax credit.

Section 101-Definition of Employer-Section 101 would amend the definition of "employer" in the FUTA to include any person who paid wages of $300 or more in any calendar quarter of the current or preceding calendar year. This change from the present requirement of four workers in 20 calendar weeks would bing an additional 2,854,000 workers and 1,601,000 employers under the coverage of the FUTA. About 1.5 million of the workers and 855,000 of the employers would be added to coverage under State unemployment insurance laws; the rest are already covered by those State laws which have more extensive coverage provisions than those of the FUTA.

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The original Federal limitation to persons with eight workers in 20 weeks was thought to be necessary for administrative reasons but was expected to be temporary. Federal coverage was reduced from eight to four in 1954 but the 20 week requirement was retained. However, a worker's need for protection was not regarded as dependent on the number of his fellow workers and it was always expected that coverage would be extended further as soon as the administrative feasibility of such further extension had been demonstrated.

Ten States began unemployment insurance operations with coverage of some employers of one worker, while 31 States adopted the Federal limitation of eight workers in 20 weeks. By 1945, the number of States covering firms with one worker had increased to 17. Now, 25 years later, it has increased by only seven more States. There are 25 States which still basically use the Federal limitation, even though a few of them have alternative provisions to ensure coverage for a very large employer who does not operate for 20 weeks.

This experience of more than 30 years makes it clear that only Federal action will result in generally increased coverage of workers in small firms.

Experience of the States which have extended their program to small firms indicates both that such coverage is feasible, and that the workers of such firms have about the same risks of unemployment as workers in larger firms.

There are seven States which, like the Federal OASDHI program, include all employment, as defined, without any size of firm restrictions. Their experience has not revealed any serious problems resulting from such broad coverage. Nevertheless, some affected by universal coverage would furnish only very brief or casual employment. To exclude such incidental employment, the bill proposes a $300 quarterly payroll limit. This was the cutoff recommended by the Interstate Conference of State Employment Security Agencies in 1966. Moreover, of the six States which use a quarterly payroll test to define "employer," none uses an amount higher than $300.

This $300 quarterly test covers about a quarter of a million more workers than would have been covered by the more complicated dual test of $1,500 wages in a quarter or one worker in 20 weeks that was in the 1966 bill. The dual test was needed, because the 20 week requirement would omit some sizeable employers, while the $1,500 quarterly payroll would omit small ones with very regular employment.

The $300 must be wages paid for "employment" to an "employee." In general, individuals who are self-employed or independent contractors are not employees under common law and are not covered by the unemployment insurance law. They are not included in the list of occupations which would become exceptions to the common law rule under section 102. Moreover, no change is proposed in the provision now in section 3306(c) (3) of the FUTA which excludes as casual labor services not in the course of the employer's business by an individual who is not so employed for at least 24 days in a calendar quarter, and paid at least $50 in cash wages.

Section 102. Definition of “Employee”—Section 102 would apply to the FUTA the definition of "employee" now used for OASDHI, with minor changes. Under the present FUTA, the term "employee" includes only an officer of a corporation and an individual who has the status of an employee under common law. The OASDHI program starts with this definition, but adds to it individuals who are not employees under common law but are engaged in certain categories of occupations. These categories were included as "employees" rather than as selfemployed because they perform services and occupy a status not materially different from those of individuals who are employees under common law. For this reason, it is desirable to give most of these workers the protection of unemployment insurance. Among the occupations to be included under the FUTA are agent drivers and commission drivers engaged in the distribution of meat, vegetables, fruit or bakery products, beverages other than milk, or laundry or dry-cleaning services, and traveling or city salesmen engaged in selling products for resale or business uses. The OASDHI definition also includes full-time life insurance salesmen and industrial homeworkers but these two groups would not be included under the FUTA. The FUTA elsewhere contains a special exclusion for commission insurance agents.

The change in definition will extend unemployment insurance to about 200,000 workers. Virtually no employers would be added by this section, since the employers of these workers use other workers who are now covered under the unemployment compensation system.

This provision is identical with one included in H.R. 15119.