covered employment were still taxable. In the quarter century since then wages have steadily increased so that today only about half of wages in covered employment are subject to the FUTA. The wage base for OASDI, on the other hand, has increased repeatedly to its current level of $6,600.

The widening gap between wages subject to contribution and total wages in covered employment has contributed to serious financial problems for the unemployment insurance program. The unduly low base has created and is accentuating inequities of the incidence of both State and Federal taxes among covered employers.

State considerations

Since benefits are related, even though imperfectly, to weekly wage levels, the benefit outgo of State funds over a period of years has increased proportionately more than their contribution income.

When benefit costs increase at a more rapid pace than do the amount of taxable wages, as now happens with the $3.000 base, the overall cost of benefits comes closer to, and may even exceed, the standard tax rate of 2.7 percent of taxable wages. Since it is difficult for a State to raise its maximum rate substantially above those in other competing States, minimum rates must be increased as the Statewide cost rate approaches the maximum statutory rate. Increasing the taxable wage base has the effect of reducing the overall cost as a percent of taxable wages, and permitting States to improve the operation of their experience-rating systems by providing a wider range of rate variations, and a greater number of rate intervals. Thus, rates can relate more accurately to employer experience. A higher, and more realistic taxable wage base will also decrease inequities between employers with respect to effective tax rates—that is, unemployment taxes as a proportion of total payroll. Employers with high levels of wages pay lower effective tax rates than do lower wage employers. A high wage employer with such unfavorable experience that he nominally pays an above-standard State rate of 3 percent may, in fact, pay a lower proportion of his total payroll than another employer whose favorable experience entitled him to a reduced rate of 2.0 percent, but whose taxable wages represent a higher proportion of his total payroll. As wages continue to increase unevenly among employers, but taxable wages remain frozen at a level well below average wages, such inequities will increase.

States have recognized the need for action in this area. Currently, 18 of them use a base higher than $3,000. Interest in raising the base has been expressed in other States, but action has been hampered primarily because of the fear of interstate competition. The laws of 28 States provide for levying contributions on a wage base above its current level if and when the Federal Unemployment Tax base is increased, thus indicating the preference of State legislatures for Federal initiative in this area.

Federal considerations

The revenue from a 0.4 percent tax on a $3,000 wage base has become insuffi cient to finance the administrative costs of the employment security program. Since the program is primarily a service program, expenditures for wages and salaries represent a major administrative cost. As general wage levels increase, the wages of employment security personnel increase, and the costs of goods and other services purchased in the administration of the program also go up. Other factors increasing administrative costs are growth in the number of people served by the program, and the addition of new programs and functions. Improvements in efficiency and staff productivity have counter-balanced a part of the increase that would otherwise have occurred, but further increases in these costs must be anticipated.

An increase in the wage base is a more effective and equitable way to raise the necessary additional Federal revenue for administrative expenses than an increase in tax rate.

It is more effective, since an increase in the tax rate on the present base would become inadequate very quickly. Administrative costs will continue to rise with rising wages and prices, while tax revenue on a $3,000 base will be increased only slightly by the increases in wages. The proposed taxable wage base will for sometime be responsive to wage increases, and will tend to expand revenue to keep pace with administrative costs.

It is also more equitable because it reduces the variations between low-wage and high-wage employers in the net Federal tax rate as a percent of total payroll. The effective rate paid by low-wage employers is higher than that paid by high-wage employers. Consequently, on the average, employers in low-wage

States pay relatively higher effective rates than employers in States with higher wage levels.

TAX RATE

S. 1991 would increase the Federal tax from 3.1 percent to 3.25 percent, but the increase of 0.15 percent is earmarked to finance the program of extended benefits.

S. 1991 would provide no increase in the tax rate for costs of administration, but would rely on the proposed wage base increases to produce sufficient additional revenue for the administrative costs of operating the program. Increasing the base is definitely a preferable and more equitable means of increasing administrative revenue than a tax rate increase.

Additional Federal revenue will be needed to finance any program of extended benefits, whether the program is limited solely to a Federal sharing of the costs of recession benefits, as in H.R. 15119; provides for Federal payment of benefits to qualified exhaustees at all times, as in S. 1991; provides both Federal financing of recession benefits and Federal sharing of State benefits to the long-term unemployed, as is now proposed. The amount of revenue needed will, of course, depend upon the type of program ultimately adopted. The recommended combination program of regular and recession extended benefits and the administrative costs of the employment security program could be financed by a 3.3 percent tax on a $6,600 taxable wage base. The added 0.2 percent would be earmarked for the extended benefits programs. However, until a higher wage base become effective, it will be necessary to earmark a portion of the tax for adminis trative purposes.

Title III of H.R. 15119 provides for an increase in the Federal Unemployment Tax rate from 3.1 percent to 3.3 percent, effective January 1, 1967. The net Federal portion of the tax is thereby raised from 0.4 percent to 0.6 percent. The 0.6 percent net tax is earmarked with 0.1 percent to be used for financing the extended unemployment compensation program provided in Title II of the bill and 0.5 percent available for administrative expenses. These amounts should be adequate to finance the proposed benefits and administrative costs, assuming approval of the proposed increases in the wage base.

Secretary WIRTZ. I will summarize quickly and emphasize points of particular interest. I will start at your own point, that at no previous times, at least in recent years, has there been a comparable situation economically.

We do face this problem now with a great advantage of facing it not from desperation but with the possibility of doing a very constructive job in meeting the unemployment insurance needs at a time of what is comparatively a prosperous economy.

The CHAIRMAN. This is one time you might say that we haven't got to conduct ourselves as though we are a smalltown fire department with one firetruck fighting four or five different fires, all at the same time.

Secretary WIRTZ. That is right.

The CHAIRMAN. We can look at it and go at it in a scholarly fashion. Secretary WIRTZ. I have tried to think of a figure of speech that summarizes it. I believe we are about in this situation. We are going along real well. The question is as to the condition of our spare tire and of the jack in the back of the car. Now, I think the spare tire has got air in it, but there is a real question about how good a jack we have got, if anything goes wrong. It is more of a question than the country as a whole realizes, because what we forget is that these unemployment figures which come out each month are average figures, and they are averages that conceal incomparable success on one hand and a very serious problem on the other.

Just a few statistics to put that picture in focus. We think of ourselves, and correctly, as having the best employment picture in recent years. It comes as something of a shock to realize that last month,

despite the healthy state of the economy, there were 3.9 million people unemployed in this country.

The CHAIRMAN. For them, that is a very serious matter.

Secretary WIRTZ. Sure, exceedingly serious. It is also an understatement of the problem in a couple of respects. The country doesn't quite realize that these are monthly averages, and they conceal a much higher number of people who are, from one time to another during the year, the victims of unemployment.

It always comes as a shock, I think, to realize that during a year as good as last year, 1965, there were over 14 million people who were unemployed at one time or another. It fluctuates; it is a different group each month.

For only a small number of people now is unemployment in this country a desperate situation. For a great many more it sure takes all the cream off the bottle as far as the work year is concerned.

And so I point out that in a year as good as last year, there were what we call spells of unemployment for over 14 million different people.

The averages do confuse the situation. They also do not distort but camouflage another of the serious facts on it. The employment situation in general is very good, but for some parts of the population it is still exceedingly bad, and I think particularly of two groups. One is the younger worker group. We just haven't got it licked yet as far as the younger workers are concerned. This economy is turning over so rapidly, which is all to the good, and young people are coming into it so fast, which is all to the good, that we disregard, sometimes, the fact of the dislocations which result with this entry into the work force. We are still working with an unemployment rate, as far as younger workers in this country are concerned, of from 12 to 15 percent, which is exceedingly unfortunate. It just means that we are bruising with frustration about one out of every seven of those who come in with the work force, and we haven't got that problem licked yet.

We sure don't have the problem of the minority worker group licked yet, with an unemployment rate there of over twice the white unemployment rate. We have not met that problem yet. We have very serious problems of unemployment, which remain to be met.

Another thing which is too little realized, is that the present unemployment system hits as small a part of our unemployment problem as it does. It comes as a startling fact, even to those of us who work with it, to realize that of the 3.9 million people who were unemployed last month, less than 1 in 5 of them was receiving unemployment insurance. So, it is less than 20 percent of the unemployed group right now. Now a large part of that is because these are unemployed people who have not had the connection with the work force yet which brings them into protection as far as the laws of the various States are concerned.

Another large group, however, has exhausted its unemployment benefits, which presents a very serious problem, and another substantial group is disqualified under the system for one reason or another.

So, we are talking about an unemployment insurance system which, in terms of its application to the unemployed, last month represented only about 20 percent of it.

Now, I should point out that last month is a low month in that respect, because it is a month of very large influx of youngsters into the

work force, which means that the coverage is less. But it is still a very serious situation.

One other preliminary, Mr. Chairman and members of the committee, and then to turn to the details of what we have before us. It would be a terribly serious mistake to underestimate the significance of the fact that the Congress, the administration, have taken a first good look at this legislation in the 30 years since it has been enacted. It is 30 years old now. In a good many respects it is exactly the same, in most respects it is exactly the same as it was 30 years ago.

That was a period when we were legislating from desperation in this country, and we did a fantastically good job of it. We didn't do so good a job that those same principles apply now, 30 years later, when we are moving through the sixth year of a prosperity which has been uninterrupted and which we expect to continue. We need an unemployment insurance program in this country today to meet the remaining unemployment problem in prosperity, not in the period of desperation which we faced before. And so there is the need for very real surgery as far as this legislation is concerned.

One other general point. You have before you two pieces of legislation, the one which you have referred to, H.R. 15119, and S. 1991, which is the original proposal submitted in the Senate. I should like to be as clear and plain, and at the same time as careful as I can, about our view with respect to the relationship between these two pieces of legislation. H.R. 15119 represents, as you know, the careful deliberations of the House Ways and Means Committee with respect to this matter. It was gone through in very great detail. The result of that proposal is in some quite material respects different from S. 1991.

In a good many respects, Mr. Chairman and members of the committee, we would support what the House committee did, and which is reflected in H.R. 15119. I would like to make it clear that with complete respect, and wanting not to be presumptuous in any way, we think there are several very material points on which H.R. 15119 falls short of what needs to be done after 30 years as far as this legislation is concerned, and in the fuller statement there is reference to the particular points in which those changes seem to us important. I think, Mr. Chairman and members of the committee, that there will be great pressure on this committee to say this matter was looked at carefully by the House Ways and Means Committee, and there was worked out a balanced result which shouldn't be tinkered with. Mr. Chairman and members of the committee, I would have to say to you quite frankly, and again with full respect, that what emanated from the House Ways and Means Committee seems to me a great advance, but seems to me to fall so far short in these three or four respects that to settle on it would be a waste of the full opportunities that come now for the first time after 30 years to make this change.

That point is most important in connection with the question of a standard for the benefit levels as far as unemployment insurance is concerned.

The CHAIRMAN. In other words, you think that S. 1991, as introduced by Senator McCarthy for himself and a number of other cosponsors, more adequately meets the problem than does the Housepassed bill, H.R. 15119.

Secretary WIRTZ. That is correct. At the same time that I say that, and without qualification, I would respect some of the changes and the basis for some of the changes that were made in the House bill. The CHAIRMAN. You feel that H.R. 15119 is a good bill, but you think that it would be better if you had some of the provisions that are also contained in S. 1991.

Secretary WIRTZ. I think the good bill now, as a practical matter, lies between the original recommendations which are reflected in S. 1991, and H.R. 15119. I could not say to you, Mr. Chairman, without qualification or explanation, that I think H.R. 15119 is "a good bill," because it left out too much. I should much prefer to testify without qualification in support of S. 1991.

I realize that that would not be the most constructive approach to this committee, and, therefore, I would like to present the situation in terms of S. 1991, but recognizing those points on which H.R. 15119 reflected what I think are practical, worthwhile changes.

The CHAIRMAN. As I understand it, you would like to testify in favor of those features of S. 1991 that the House did not see fit to go along with.

Secretary WIRTZ. That is correct. The omission is most acute, and particularly sharp in connection with the matter of the benefit levels as far as the amount.

The CHAIRMAN. Do I take it that you support H.R. 15119 insofar as it goes?

Secretary WIRTZ. Let's see. We will suggest to you

The CHAIRMAN. The House bill, H.R. 15119?

Secretary WIRTZ. Yes. We will suggest to the committee two or three or four points with respect to which we would support what the House did, but would suggest some minor modifications. Let me just be illustrative on it. H.R. 15119-to take not the most important feature, but one of the cleanest cut-adds a provision for judicial review. Now, we would support that. We would suggest to this committee that the standard for review ought to be a somewhat different standard in terms of the substantial weight of the evidence, and so on and so forth. That would be an illustration of the kind of provision on which we would support what the House has done, but would feel that some minor modifications are necessary.

So, in general, my answer to your question would be affirmative, that we would support it as far as it goes, and would emphasize those additional three or four matters with respect to which we think there ought to be a closer approach to S. 1991.

The one on which there is the greatest significance there has to do with this matter of the benefit levels, which is covered in my statement on page 9 and the pages following. Very briefly, the point on that, Mr. Chairman and members of the committee, is this. S. 1991 makes this very simple suggestion and proposal, that an employee's benefits when he or she is covered by unemployment insurance, should be 50 percent of that employee's earnings, or 50 percent of the average earnings for covered employees in that State, whichever is less.

Now that seems so low a guarantee of protection that it is a little. hard to see where the objection to it comes, but I want to go into that a little further. S. 1991 suggests that that figure of 50 percent be increased to 60 percent after a period of experience, and then even