Mr. KARSTEN. Could you name a State that does meet both duration and benefit level?

Mr. O'CONNELL. Not specifically.

Mr. KARSTEN. Thank you very much.

What about the question of States rights? Do you think that is a prerogative of the State, when you get down to a matter of benefit levels or duration of benefits?

Mr. O'CONNELL. I don't know exactly what we mean by States rights.

Mr. KARSTEN. I have heard the term applied this morning. I am trying to get an explanation myself.

Mr. O'CONNELL. I don't think you heard it from me, Mr. Karsten. Mr. KARSTEN. You don't feel, then, that that is entirely a prerogative of the State?

Mr. O'CONNELL. I would say I couldn't argue that anything in the system is entirely a prerogative of the States. The system was set up on a joint Federal-State relationship basis and to me the test is whether you achieve the desirable results with the present division of responsibilities.

Mr. KARSTEN. With the present division of responsibilities you can't name a single State that has brought its benefits up and standard duration to what the President recommended since 1954?

Mr. O'CONNELL. No, nor would I say that the States are not moving and that they aren't even at this time reviewing in many legislatures this question, and I don't want to try to predict what the States will do in this particular situation or later.

Mr. KARSTEN. Of course you couldn't predict but we have been hoping ever since 1954 and we may perhaps continue to hope unless we do get a set of standards.

That is all, Mr. Chairman.

Mr. FORAND (presiding). Mr. Curtis will inquire.

Mr. CURTIS. Mr. Secretary, I was very much interested in the questions that Congressman Byrnes was asking with regard to the actual fiscal setup of these various reserve funds.

Now, one point I would like to pin down. It is true, is it not, under the system that there will be a recoupment to some degree of the funds spent during this recession on unemployment through the increased experience rating that is built into the system? In other words, you are going to have employers paying a higher tax in practically all the States, I guess, as a result of the unemployment experience in the past year or year and a half or 2 years, isn't that true? Mr. O'CONNELL. It will recoup the reserves in the State system. Mr. CURTIS. Yes. Well, that is a fact if it becomes important. I think the discussion of your paper and also the questions have been directed to this as if it could be regarded in one particular phase of an economic cycle. This system, though, is set up on the basis of an economic cycle, is it not, the theory?

Mr. O'CONNELL. Yes, I presume so.

Mr. CURTIS. I would hope so. And based on that, I would assume that as we go into a period of increased employment and what we might say decreased unemployment, we are going to start rebuilding these funds automatically, are we not?

Mr. O'CONNELL. The State funds, the State reserve funds

Mr. CURTIS. I am also talking at the Federal level. Now, what I would like to get is a projection on the system as it is in relation to the Reed fund and incidentally, there will be repayments to the Reed fund and other funds by the States and when those repayments might be effective.

Mr. O'CONNELL. Projection over what period, Mr. Curtis?

Mr. CURTIS. Projection over the next few years so we can get an idea and of course that will have to be on the assumption over a certain employment and unemployment rate but I think if we are going to talk sense we have got to have that kind of a fiscal projection.

Mr. O'CONNELL. We will be glad to supply it in that form.

Mr. CURTIS. Also, the one reason we set up the Reed fund was because at that time in a period of better employment and certainly less unemployment we found the three-tenths of a percent was producing more funds at the Federal level than we needed and so were figuring out how we could dispose of them.

Now, I would think that we would also project the Reed fund on the assumption that we will be going into, if we are going to go into, a period of better records on unemployment, to see whether or not the three-tenths of a percent might really be adequate over an economic cycle. So I would like to request that the estimates be made on the basis of an economic cycle rather than just upon the coming out of a period of unemployment.

The CHAIRMAN. Without objection that material will be inserted, Mr. O'Connell, at this point in the record.

Mr. O'CONNELL. Yes, Mr. Chairman.

(The information follows:)

ESTIMATED YEAR-END BALANCES OF THE FEDERAL UNEMPLOYMENT ACCOUNT

The estimated year-end balances of the Federal unemployment account, shown in the following table, are based on the following assumptions:

(1) During fiscal year 1959 the Congress will appropriate $15.6 million to the account from general revenue. The appropriation will permit the account

to comply with Pennsylvania's request for an advance of $112 million. (2) Insured unemployment will average 5.3 percent for fiscal years 1960 through 1964. Thereafter the rate will decline gradually.

(3) Employment and wages will increase by about 2 percent per year. (4) No State will need a loan during the foreseeable future years.

(5) Repayment of currently outstanding loans will be accomplished under the automatic repayment provision of the Reed Act.

(6) Interest credited on assets of the Federal unemployment account will continue at a rate of 2.5 percent.

Estimated year-end balances of the Federal unemployment account

Differs from A in that $5,000,000 excess Federal tax collections not available in fiscal year 1960.

Advance from general revenue in fiscal year 1959 of $15,600,000 reduced by interest of $1,400,000 credited to account on June 30, 1959.

'Deficit.

Additional amounts to administration fund or to States.

Mr. CURTIS. I was disturbed myself if I interpret the chairman's remarks as to his feeling of an inconsistency, or let us put it this way, it was my feeling at any rate of an inconsistency of philosophy that the recommendations are to set up Federal standards at least as far as one or more employees are concerned, to change the basis and that is a Federal standard but not to go into this area of duration and amount. It seems to me that all of these items are Federal standards and if this has been a well-functioning system, and my observation certainly is that it has been one of the great systems because it has

functioned so well, it would seem to me there would be a burden of proof upon anyone who would seek to alter the balance between the States and the Federal Government in this picture between all three of these areas, but I notice in two of them you think that that balance should be altered.

Mr. O'CONNELL. I was trying to indicate, Mr. Curtis, and trying in my own opinion not to be inconsistent, by pointing out that the tax base and the coverage were original parts of the act. They have been consistently. That is the tax base has been left alone since the act. Coverage has been changed by Federal law several times, or at least once or twice in the meantime. Still over this period of time the States have been allowed to develop and have developed, we think, with reasonable success their own standard for benefit and duration and we feel as you indicate that there is not sufficient reason to change the fundamental nature of this system.

Mr. CURTIS. So I get it then that you are perfectly willing to discuss whether a change should be made in all three of these areas but each one, as I get it, you want to examine on its own bottom to see whether we would improve the system by doing it.

Now, I didn't feel that you gave the real reason or at least the reasons I heard advanced as to why the Federal Government or why we have never and have been reluctant in the past, I might say, to extend the coverage of unemployment insurance as far as Federal standards are concerned from eight down to four or more and now down to one or more. I don't think it is a lack of desire on anyone's part, you see. So that our people are protected and it isn't just administrative problems that are involved. I think there are some other factors involved as well. And those are factors I would like to bring out.

First of all, you have pointed out that many States have gone and covered the employers of one or more, isn't that correct?

Mr. O'CONNELL. Yes, sir.

Mr. CURTIS. They still can do that, can they not?

Mr. O'CONNELL. Yes, sir. Eighteen, I believe, is the present number.

Mr. CURTIS. Yes.

Mr. O'CONNELL. In one form or another.

Mr. CURTIS. Why is that not satisfactory? If the States know the problem and if they feel that this is a problem in their States they certainly can move in as 18 of them have to do this to extend further?

Mr. O'CONNELL. I think that there are two points. One is that we believe that all individuals who can reasonably be covered, talking about individual employees, should be covered.

Mr. CURTIS. Well, now

Mr. O'CONNELL, I mean there is another side to this and that is that employers in these areas should be, I think-this is a Federal tax on employers. I don't know whether I should want to argue the merits for the philosophy of the tax on employers. But it is a Federal tax which is obtained by the tax on employers. This is one of our reasons, for instance, of feeling it is a Federal Government function to decide which employers should be covered.

Mr. CURTIS. Here is one bit of philosophy that I was sorry that wasn't mentioned and I think it is very basic and probably one reason

some States have decided not to cover employers of one or more or down in this low category where all they are employing is the top four pople, is because you have an entirely different relationship between an employer of those few and an employer of larger numbers. There is a very close personal relationship between an employer of three or less and in direct instances I think an examination would reveal they are members of the family in some way, relatives. Certainly there are a lot of intangible fringe benefits that flow to an employee where there remains this close relationship of employer and employee. That is a factor, is it not?

Mr. O'CONNELL. You have to distinguish a little, Mr. Curtis. In the first place, direct relationship within certain degrees would be excluded.

Mr. CURTIS. I appreciate that. You wouldn't have a first or second cousin someone?

Mr. O'CONNELL. I would say the relationships which you have described can occur and I likewise say that there are many instances in which the employee is an employee in every true sense and would so identify himself.

Mr. CURTIS. Well, the point I am making at least, whether that holds water or not, is that as a general rule that is one of the reasons why some States have not gone down there and it isn't because they are not interested in those employees; it is the fact that those employees due to a close relationship are in a different economic category from others.

Now, I would think that we would have to think a long time before we as a blanket move made a standard all over the Nation, when many States apparently have found that for reasons that they think are good at any rate, it isn't wise to go into that particular category. Mr. O'CONNELL. Álmost all of the States have a provision whereby if the Federal Government were to extend the coverage they could immediately go in.

Mr. CURTIS. That is simply to protect themselves. They haven't decided as a matter of policy that they want to do that. I might ask this question. Do all States permit an option whereby an employer of less than four can take out coverage if they want to? Mr. O'CONNELL, I think all.

Mr. CURTIS. Yes. So that even in that area how much evidence do we have or how much material have we developed of the recent unemployment picture and the present unemployment picture to find out how many of the unemployed, particularly the long-time unemployed are actually employees of an employer of four or less?

Mr. O'CONNELL. I don't think we have detailed information nor can we get it too closely. Our best source of this kind of information comes from covered employment and they aren't covered.

Mr. CURTIS. I understand that. Yet that would be an important thing to know because what little evidence seems to come on, taking the field of service, you noted that, of the employees of four or less are in the service fields, retail, real estate. Actually in the service field we have a situation of more jobs available than there are people to fill them and I suspect that we would if we examined-let's turn it around to another question. We have examined into where this unemployment that we are presently experiencing and did experience

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