Early History of Unemployment Insurance
By: Abe Bortz, Ph.D., Historian of the SSA
Note: This entry is a portion of Special Study #1, a lecture Dr. Bortz, the first SSA Historian,developed as part of SSA’s internal training program. Up until the early 1970s new employees were trained at SSA headquarters in Baltimore before being sent to assume their new duties in offices around the country. As part of this training, Dr. Bortz presented a curriculum on the history of Social Security. This lecture, developed in the early 1970s, was the core of that curriculum. It features an extensive overview of social policy developments dating from pre-history up to the passage of the Social Security Act in 1935.
Unemployment insurance emerged as an issue in American social politics during the 19th century. Agrarianism, the movement led by labor radicals from the 1870’s to the 1890’s were both associated with numerous proposals for Government public work programs. These were significant in their emphasis upon Federal responsibility, and in their implication that society owed citizens the right to work.
Relief agencies and charity organization societies endorsed no such principle as the right to work. Even in a depression, relief had to be restricted and controlled, not extended through vast public expenditures. The 1890’s, like previous depression eras, witnessed a proliferation of public and private, regular and emergency, relief programs. The period was distinctive for its experiments in work relief, as a supplement to relief in money or commodities. However, it was argued by many leaders, work relief, if offered, should not be allowed to compete with the private market.
Fear of the pauperizing effects of relief was intensified by an increase in the army of tramps, vagrants and beggars. For their numbers swelled in the 1890’s with long strikes adding to the total. Also, talk began to be heard of the effects of heredity and eugenics as factors affecting those who were unemployed.
After the turn of the century, it was discovered that feeblemindedness constituted a source of poverty, pauperism and crime.
In trying to understand an alternative toward unemployment relief, remember, we were a people who drew many of our economic virtues from the mores of an agricultural economy. On the farm and in the village, the sources of minimal living were ever present and usually cheap. Thrift was closely reflected in physical action and tangible resources– a well kept farm and house, and a cellar well stocked with food. The man who faced want had failed to exercise thrift and since labor was usually scarce, he could trade work for food with those who were more farsighted.
In 1914 the American Association for Labor Legislation sponsored two national conferences on unemployment at a time when the United States was hit by a recession.
1. It proposed public employment exchanges to help prevent unemployment.
2. A plea for regular and emergency public works programs in periods of economic decline.
3. And, this was its dominant theme of the 1920’s, The American Association for Labor Legislation called for the regularization of industry.
4. It proposed social insurance as a technique to control unemployment.
Both the United States and the British launched public employment exchanges– United States on the State level actually as far back as the 1890’s, and during World War I, and the British even earlier. Yet, the idea of labor market adjustment through public employment exchanges proved a failure. In both countries employment offices came to function as adjuncts to unemployment insurance – rather than the reverse as anticipated.
So, by the 1920’s — it was recognized that prevention would not be achieved through a national public exchange system. Attention turned to public works contracts as a countercyclical device. It was estimated that by 1928-1929, public works amounted to 35% to 40% of all public and private construction and totaled some 3 1/2 billions dollars.
In retrospect the public employment and public works ideas were significant for their emphasis upon cooperative Federal-State arrangements. Like the vocational rehabilitation and maternal and child care programs of the 1920’s, they helped familiarize Americans with techniques adopted for the relief and social security programs in the 1930’s.
As just noted, employment stabilization emerged as the leading technique of prevention in the 1920’s. Job security through efficient industrial management was proclaimed as the outstanding American contribution to the theory and prevention of unemployment. Yet regularization proved to be the exception rather than the rule in American business in the 1920’s.
A few companies and several union plans paid unemployment benefits. Some 106,000 employees in 1928-1929 were covered by voluntary unemployment insurance plans; 1/3 of these depending on union rather than on company benefits. By 1931, during the depression employees covered under these plans was only 116,000.
Unemployment insurance was discussed in Congress during the 1920’s, however, unemployment insurance did not become a real issue until after 1930. One important factor, hindering its development was the position taken by organized labor. The A.F. of L. had long opposed compulsory unemployment insurance. This was inherent in its rejection of compulsory insurance for any risk except work-connected injuries or disease. Even as the depression began to swell the ranks of the unemployed, resolutions endorsing unemployment insurance that were introduced at the 1930 and 1931 conventions of the A.F. of L. were opposed on the grounds that such legislation would tie workers to their jobs, open the door to discrimination against union members and be less effective than limitation of hours or work sharing. In 1932, however, with millions of workers unemployed, the A.F. of L. finally reversed its position and endorsed compulsory unemployment insurance. The report adopted by the convention indicated that a single national system would be preferable, but to avoid the constitutional question, urged State legislation which met specified standards.
Unemployment compensation measures were introduced in a number of States before 1935, but enactment was blocked by fear on the part of individual States of putting their employers at a competitive disadvantage. A device to overcome this difficulty was embodied in a bill introduced in Congress as the Wagner-Lewis Bill in February 1934, which provided for a Federal excise tax on employer payrolls, to be offset by employer contributions to State unemployment insurance funds. It remained stalled in Congress.
Meantime, in the States an unemployment compensation law had been introduced in the Wisconsin legislature at every session since 1921 – the Huber Bill, which had been devised by John R. Commons – was finally passed in 1932, as the Groves Act. Groves was also a former student of Commons and Professor at Wisconsin. A major role in formulating this piece of legislation was played by Paul Raushenbush and his wife, Elizabeth Brandeis (daughter of Supreme Court Justice Louis D. Brandeis.) This law was designed on the workmen’s compensation analogy – to give employers an incentive to stabilize employment by setting up individual reserve funds for each employer, with no pooling of risks, and with exclusive employer financing.
Delayed for some time, Wisconsin’s Groves Act finally went into effect in July 1934. Contributions equaled 2% of payroll for the first two years and continued until an employer’s reserves averaged $55 per employee; at which time the contribution rate then dropped to 1% until the reserve averaged $75 per employee. Then contributions terminated. This part was limited to businesses with 10 or more employees. No one making over $1,500 a year was covered. There was a two-week waiting period with benefits running for but 10 weeks and with a $5 minimum and a $10 maximum. Requirements called for a 2-year State residence and 40 weeks of employment to qualify.
The Wisconsin plan had political leverage in comparison to the pooled insurance system – to which reference will shortly be made. It possessed an incentive to prevention, appealed to businessmens competitive instinct and was compatible with the profit motive in a free enterprise system.
Turning to its chief competition, in 1932, the Ohio Commission on Unemployment, reflecting I.M. Rubinow’s thinking and philosophy, proposed a pooled unemployment insurance fund jointly financed by employers and employees. (Organized labor opposed the employee-contribution.) Unlike the Wisconsin Plan, the Ohio plan called for a $15 a week maximum (as against $10 for Wisconsin) for 16 weeks (as compared to 10 for Wisconsin). A merit rating provision was included in the Ohio proposal, allowing employer contributions to range from 1 to 3 1/2%. However, it had not been enacted into law by the time the Social Security Act was passed in August 1935.
The controversy between the proponents of these two types of legislation had much to do with the subsequent adoption of a Federal-State rather than a national system of unemployment insurance.