The CHAIRMAN. Without objection, Mr. Lester, you may include other material requested by Mr. Alger in the record at this point. (The material referred to is as follows:)

ADDITIONAL COST CONSIDERATIONS IN SUPPORT OF REINSURANCE

This supplementary memorandum is submitted in further answer to some of the questions raised in yesterday's hearings, especially in connection with my testimony.

One question implied that Michigan would always be the chief gainer among States under a reinsurance program because in calendar year 1958 the total benefit payments in Michigan amounted to 6.3 percent of taxable wages, Alaska coming next with a ratio of 5.4 percent and then Pennsylvania with 4.7 percent. The assumption seemed to be (1) that a reinsurance program would be of special benefit to Michigan and (2) that an annual benefit outflow of 4.3 to 4.7 percent of taxable wages is a rate that a State can meet without affecting its industry in interstate competition. Both conclusions are invalid.

THE VARYING STATE IMPACT OF RECESSIONS

In the two preceding postwar recessions (1948-49 and 1953-54) the benefit drain on States was significantly different from that in the 1958-59 recession. In calendar 1949 the States with total benefits in excess of 2.7 percent of taxable wages were:

Rhode Island_.

California___.

New Hampshire_.

New York-‒‒‒

Percent

6.2 Connecticut.

4. 0 Maine___

4. 0 Vermont_.

3.7 Alaska__

Percent

3.2

3. 1

3.0

2.9

2.8

Massachusetts..

3.3 New Jersey--.

Note that Vermont and New Hampshire are on the 1949 list but not among the 22 States on the 1958 list attached to the statement I presented with my testimony. And note especially that Michigan was not on this 1949 list because in that year its total benefits were only 1.9 percent of taxable wages.

In calendar 1954 the distribution of the States with a ratio of total benefits to taxable wages in excess of 2.7 percent was as follows:

Note that Kentucky, Michigan, Pennsylvania, Tennessee, and West Virginia are on the 1954 but not on the 1949 list, and California, Connecticut, Maine, Massachusetts, New Hampshire, New York, and Vermont are on the 1949 but not on the 1954 list. Also note that Michigan is down near the bottom of the list in 1954.

RELATIVE COST BURDEN ON STATES' INDUSTRIES

The benefit outflow for New Jersey in this recession has been a serious one. Even with the so-called recovery, unemployment in New Jersey reached a peak of 221,600 or 9.3 percent of the labor force in January, which was approximately the same as the previous peak of 222,000 in March and May 1958. The result has been that total benefit payments under the State program amounted to $53,685,421 for the first quarter of 1959, which is around 4.8 percent of taxable wages in the State for a quarter.

During 1958 and the first quarter of 1959, total State benefits in New Jersey amounted to $240,552,202, or the equivalent of about $160 for every covered worker in the State. (This compares with a figure of around $40, or one-fourth as much, in States like Florida, Virginia, and Texas.) Although the average employer-plus-employee tax rate for unemployment in New Jersey in 1958 was 2.17 percent, New Jersey's reserve fund dropped by $110,643,000 between December 31, 1957, and March 31, 1959, and in addition the State went into debt to the Federal Government to the extent of $41,244,682 during the same period under the temporary unemployment compensation program and will be in debt to the Federal Government under that program by over $30 for every worker in covered employment in the State when the program ends on June 30, 1959.

In contrast to an average New Jersey tax last year of 2.17 percent of taxable payroll are these average rates: 0.4 percent for Virginia, 0.6 for Texas, 0.6 for Colorado, 0.7 percent in Delaware, and 0.8 in Florida. It is interesting to note that Florida, Virginia, and Texas not only had no temporary unemployment compensation program but had low maximum durations of 5-16 weeks, 8-18 weeks, and 8-plus to 24 weeks respectively. Indeed, the Florida duration was actually reduced during the past 6 years, for in 1952 it was 7-plus to 16 weeks. During yesterday's hearings, Congressman Alger stressed that increasing unemployment taxes (even temporary increases caused by raising the Federal unemployment tax base from $3,000 to $4,200 with experience rating) would mean higher production costs, less employment, and higher prices. If a temporary unemployment tax rise of 40 percent would have such adverse effects on employment and prices, surely a much higher percentage unemployment tax rise in an individual State would have a much greater effect on employment and prices in that individual State. And surely a State with an unemployment tax three times as much as in a number of other States thereby handicaps its industry in interstate competition through higher costs and higher prices. On the basis of his tax reasoning, it would seem that Congressman Alger would be especially concerned about the employment and price effects in individual States from heavier unemployment taxes resulting from a markedly uneven incidence of unemployment.

As I pointed out in my testimony, recession unemployment chiefly arises from causes outside the State. The customers of New Jersey industry are largely firms and consumers in the other 47 States and abroad. In the other 47 States the customers include steady employers who lower employment in New Jersey by drawing down their inventories of Jersey produced items, by reducing their purchases of Jersey produced equipment, and by cutting down on plant expenditures which would embody Jersey produced items. Thus, firms in agricultural States may have fairly steady employment (packing meat, canning foods, or processing fibers) yet through their inventory and capital investment policies may really be responsible for a good part of the recession unemployment in New Jersey.

Furthermore, the Federal Government, through tight or loose monetary policy, through changes in the level of Federal expenditures which represent one-fifth of the Nation's gross national product, and through foreign trade policies, has a direct effect on unemployment in New Jersey.

Not only is there a Federal responsibility and an interstate responsibility for the uneven incidence of unemployment, there is also an unemployment benefit factor. Low benefit levels permit the unemployed to keep up much of their food expenditure but that is about all. The nonfarm items that they formerly bought are the ones hardest hit by low benefits.

The question that now faces a State like New Jersey is how can it meet the extraordinary burden of unemployment last year and this year, restore the balance in its unemployment compensation fund to the pre-1958 level, and pay back to the. Federal Government its borrowings for temporary unemployment compensation and also meet the next recession in the 4-year cycle, which would be due about 1962-63? How can New Jersey do all this and, in addition, improve its unemployment compensation program to the benefit levels that the Federal Government has been strongly urging for the past 5 years and yet not penalize its industry significantly in interstate competition?

In this connection, one element that should not be overlooked is the fact that unemployment benefit levels do not stand alone. If a State raises unemployment benefits, it generally has also to raise workmen's compensation and (in a State like New Jersey) temporary disability benefit levels as well. The relationships between unemployment benefit levels and the other programs in a State that represent added payroll costs are often overlooked by persons who say that unemployment benefit costs alone are not enough to affect industrial location.

The CHAIRMAN. Any further questions?

We do appreciate your bringing to us your viewpoint. Thank you very much for coming before the committee.

Mr. LESTER. Thank you very much. I appreciate the opportunity to be here, Mr. Chairman.

(The prepared statement of Mr. Richard A. Lester and the booklet, Proceedings of the Social Security Conference, are as follows:)

2

STATEMENT BY J. DOUGLAS BROWN AND RICHARD A. LESTER ON THE URGENT NEED TO REVISE THE FEDERAL-STATE UNEMPLOYMENT INSURANCE PROGRAM

Two decades of American experience, culminating in the recession of 1957-58, have shown the following principles to be essential to a sound and effective system of unemployment insurance in this country. The system

1. Should cover all who are normally engaged in employment by another. 2. If nationwide uniformity is impossible_

(a) should evolve toward such common minimum limits of adequacy and costs that the mobility of labor and industry throughout the country is not influenced, and

(b) should develop common standards of eligibility to assure equitable handling of claims in all areas.

3. Should, in all areas, provide sufficient benefits in amount and duration(a) to protect individuals, and

(b) to assure compensatory flows of purchasing power to mitigate, in some degree, the impact of business recession.

4. Should, if not a national system, utilize the financial resources and administrative powers of the National Government to reinforce the strength of the State systems, especially in time of heavy unemployment.

5. Should, in respect to the beneficiary, require a continuing attachment to the labor market.

6. Should, in respect to the employer, incorporate the principle that all must share in the assurance of an effective and available labor force, within a healthy economy.

What are the next steps in improving the American unemployment insurance program as an element in a comprehensive system? There is a great deal to be done. We are faced with a long and difficult task of reconstruction of a program that has proved structurally deficient. We cannot start over. The job is one of strengthening the mechanism we have, so that it can meet the needs and strains of the decades ahead. The most urgent steps are:

1. Establish, by Federal action, a floor in the rate of contribution to State unemployment insurance funds by any employer. This should be 0.5 percent. The 0.3 percent Federal collection would be additional to this. Such a floor is vitally needed to reverse the trend toward the competitive lowering of tax costs to entice industry from State to State.

2. Establish, by Federal action, the requirement that State programs pay benefits up to an appropriate maximum in amount, perhaps two-thirds of the average level of wages in covered employment, and for a duration up to a maximum of 39 weeks, where an appropriate earning record is evidenced. 3. Establish, by use of that portion of the 0.3 percent collection by the Federal Government not used for administration, a national reinsurance fund. The participation by State systems in the reinsurance fund should be subject to their prior and voluntary agreement to charge at all times an average rate of contribution to their own fund of, say, at least 1.2 percent, in addition to the 0.3 percent Federal collection. Under such a compact, the Federal reinsurance fund would agree to reimburse the State system as follows:

(a) One-half of the amount in any quarter by which disbursements exceed a breakpoint of 2 percent of the average covered payroll in such quarter, and

1J. Douglas Brown has been active in the study of unemployment problems and social insurance since his membership on President Hoover's Emergency Committee for Employment in 1930-31. He served on the staff of the Committee on Economic Security which in 1934-35 developed the Social Security Act and was Chairman of the Advisory Council on Social Security which in 1938-39 recommended to Congress the essential features of the present old age, survivors, and disability insurance program. He has also served on the Advisory Councils of 1948-49 and 1958-59. He was technical adviser to the New Jersey Social Security Commission in 1935-36, and assisted in the drafting of the New Jersey unemployment insurance law. From 1926 to 1955, he was director of the industrial relations section of Princeton University and has been dean of the faculty since 1946.

Richard A. Lester aided in the preparation of the New Jersey unemployment insurance law in 1936, prepared a report on "Providing for Unemployed Workers in the Transition (1945)" for the Committee for Economic Development, was a member of the Federal Advisory Council on Employment Security (1952-54), and since 1955 has been chairman of the Employment Security Council in New Jersey. He is Joseph Douglas Green, 1895 professor of economics at Princeton University and former chairman of Princeton's department of economics and sociology.

39678-59-19

(b) Three-quarters of the amount in any quarter by which disbursements exceed a breakpoint of 3 percent of the average covered payroll in such quarter.

The breakpoints for reinsurance could be set only after actuarial studies. Certain overall limits of benefit level and duration would be required to protect the reinsurance fund. The rate of 0.3 percent collected by the Federal Government might need be increased. The States should be left the responsibility to assure that they collected enough contributions in normal times to bear their share of the drain in times of business recession.

4. Encourage States facing heavy swings in employment to introduce an employee contribution into their unemployment insurance programs in order to assure adequate protection without sharply increased interstate differentials in employer cost with their adverse effects on plant location. 5. Encourage States not facing heavy swings in employment and which now have excessive unemployment insurance reserves to utilize such reserves in approved programs of cash temporary disability insurance. By this means, the existing inadequacy of protection against industrial accidents, as well as against nonoccupational illness, could be met in some degree. These steps are logical, practical, and of common advantage to the worker, employer, and the public. Whether they are politically feasible depends upon whether the parties of interest prefer to be rational or emotional in their approach to a practical economic problem. Unemployment insurance performs a valuable function in compensating both lost earnings and lost purchasing power in times of recession. This has been proved. Recessions in the United States have come to have national and international significance. It is a time for commonsense and not polemics.

J. DOUGLAS BROWN,
RICHARD A. LESTER,
Princeton University.

MARCH 1959.

STATEMENT OF RICHARD A. LESTER, PROFESSOR OF ECONOMICS,

PRINCETON UNIVERSITY

For the record, I am Richard A. Lester, professor of economics and faculty associate in the industrial relations section at Princeton University. I have been a student of unemployment relief and unemployment compensation for over 25 years. I helped draft the initial Unemployment Compensation Act in New Jersey. From 1952 to 1954, I was a member of the Federal Advisory Council on Employment Security, and from 1955 to date I have been chairman of the New Jersey State Employment Security Council. I have written extensively on unemployment compensation, including a report prepared for the Committee for Economic Development, a business group, published under the title, "Providing for Unemployed Workers in the Transition (1945)."

SHORTCOMINGS

Experience during the postwar period has clearly indicated structural and other defects in our Federal-State system of unemployment compensation.

Because of these defects, unemployment benefits are covering only 20 to 25 percent of the wage loss from unemployment in a recession, and the benefits for heads of families are generally no more than sufficient to cover just food costs during the weeks that benefits are actually being drawn.

The result is that unemployment compensation is failing to perform adequately its function as a built-in stabilizer, designed to help support consumption expenditures as production and employment slump in a recession.

The defects may be briefly indicated as follows:

1. Inadequate coverage.-In 1958 apparently one out of three who were unemployed received no unemployment insurance benefits, and at any one time in 1958 about two million unemployed were not drawing benefits under the State programs.

2. Inadequate benefits.-The benefit ceilings are generally too low and the maximum duration in most State laws is too short for a recession like that from 1957 to 1959.

When the State laws were first enacted, benefit ceilings were in proper proportion. In the late 1930's, generally the State ceilings were about two-thirds

of average weekly earnings in covered employment in the State. For the past 6 years, however, they have averaged around two-fifths with the consequence that over half of all beneficiaries have their weekly benefits lopped off by relatively low ceilings.

For the kind of unemployment we have had in heavy industry during the past year and a half, the benefit duration in the State laws is generally too short. In mid-1958 some million unemployed had been jobless for 6 months or more. The benefit exhaustion rates last year rose to abnormally high totals in States with maximum duration of only 16, 18, or 20 weeks. In such States, the number of persons exhausting benefit rights increased to a figure two-fifths to one half the number drawing their first week of benefits in those States.

3. No national sharing of unemployment costs. The incidence of severe unemployment tends to be concentrated in specific industries and areas. That means an especially heavy drain on certain State funds and the placing of an extraordinary tax burden on all branches of industry in those particular States. The uneven incidence of the drain in 1958 is indicated in the attached table, listing all the States whose benefit payments (including TUC) exceeded 2.7 percent of covered payroll last year. Also listed are the States at the other extreme, whose benefit payments in 1958 totaled less than 1.5 percent of taxable wages in the State.

The Federal-State system lacks financial arrangements suited to meet such an uneven incidence. Loans for extended benefits only increase the tax burden on industry located in the "most affected States and, thus, handicap further their industry in interstate competition, tending to cause a vicious circle of unemployment breeding more unemployment. Reinsurance is a partial remedy for such a vicious circle.

Clearly, industry and consumers in less affected States, as well as the National Government, share some of the responsibility for dips in demand for the products manufactured in the more affected States. Inadequate benefit provisions in some States help to curtail demand for the products of other States. Consequently, the Federal Government has a major interest in adequate arrangements for unemployment compensation. Particularly is that true now that recent recessions have taught us the importance of maintaining and encouraging consumption as a means of moderating and shortening business slumps.

The shortcomings in our unemployment compensation set-up I have explained more fully in a published paper that I presented at a social security conference sponsored by three Michigan universities last November. I have here a copy of that paper, which can be included with my testimony if the committee wishes.

REMEDIES

The foregoing analysis indicates the kind of remedies needed to cure some of the existing defects. For the sake of brevity, I shall explain in summary form my views on particular proposals, including those in the Karsten and other bills before the committee. I should like, however, to explain more fully the importance of reinsurance and the kinds of provisions for reinsurance that, in my opinion, a bill should embody.

1. Reinsurance or national sharing of excessive State benefit drains.-The case for some national sharing of excessively heavy unemployment benefit costs in particular States due to a national business downturn should be evident from the preceding remarks and from experience during the past year and a half.

In my judgment, any Federal reinsurance program should be simple and based only on the outflow principle, and it should not include some of the complicating eligibility requirements in the Karsten type bills. In outline form, I would set up the reinsurance program as follows:

(a) Base Federal reimbursement squarely on the coinsurance principle of sharing in the benefit costs in the State above a certain benefit outflow, say above 2.7 percent of taxable wages in the State in any calendar quarter. The Karsten type bills are unsatisfactory to the extent that they add a State fund balance requirement (sec. 1201 on p. 11, lines 7-14 and 22-23 and p. 12, lines 1-6 and 15-22) to an outflow requirement (p. 13, lines 1-7). To require that a State fund approach insolvency before that State is eligible for Federal sharing if its excessive benefits' drain is to penalize financial prudence, to discourage employee contributions which we have in New Jersey, and to encourage cyclically accentuating tax changes-the lowering of State unemployment taxes in good