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Social Security: Unemployment Insurance

Introduction: The current Unemployment Insurance (UI) Program in the United States was established on August 14, 1935 when President Franklin D. Roosevelt signed the Social Security bill which contained

Unemployed workers signing up for unemployment benefits following passage of the Social Security Act. National Archives & Records Administration.
Unemployed workers signing up for unemployment benefits following passage of the Social Security Act. National Archives & Records Administration.

provisions for UI. This legislation was the key step in establishing a UI system in the United States. In all states, the system is a federal-state joint venture, financed by both federal and state unemployment taxes.

“The fundamental case for unemployment protection lies in the fact that under a democratic form of society we are forced to prevent any large-scale starvation. Funds must be provided somehow . . . It is practical sense to build a system which will gather the funds in good times and disburse them in bad times. This simple theory underlies all formal proposals for unemployment insurance, for unemployment reserves.” Stanley King in American Labor Legislation Review, December 1933, p. 170.

Definition: Unemployment Insurance is a method of safeguarding individuals against distress for a short period of time after they become unemployed. It is designed to compensate only employable persons who are able and willing to work and who are unemployed through no fault of their own. Instead of making the individual get along on a steadily descending level of living until he/she has exhausted the last shred of his/her savings, credit, and the generosity of his relatives and friends, thus reaching a point of destitution and eligible for relief, unemployment insurance plans set aside contributions during periods of employment and provides the individual with benefits for a designated period of time.

History of Unemployment Insurance

(Note: In early 1937, as part of a comprehensive initiative to explain the new Social Security Act to the public, the Social Security Board created a series of publications attempting to communicate both the principles of operation of the various programs under the Act, and, especially important in the eyes of the government executives, the underlying rationale for the various programs. The following material is copied from a March 1937 booklet produced by the Social Security Board to explain the new federal unemployment compensation program. Source: “Unemployment Compensation: What and Why?” Social Security Board, Washington, D. C., Publication no. 14. United States Government Printing Office, Washington 1937)

Early History: Unemployment insurance is not a new phenomenon. The first unemployment insurance plans, supported by dues, were adopted by some larger trade unions in Switzerland in 1789. Even earlier, a version of unemployment insurance in trade guilds was supported by levies on guild members.

From 1890 to 1905 several cities in continental Europe established voluntary unemployment benefit plans. The first plan of this kind was started in 1893 in Berne, Switzerland, and was followed by similar plans in other Swiss, German, and Italian cities. In 1901 the Belgian city of Ghent established a system of municipal subsidies to trade union funds. Known as the “Ghent system,” it spread from the beginning of the twentieth century until World War I.

In the early part of this century many provinces or cantons began to add their subsidies to those of the cities. Some national governments also made annual grants. At the outbreak of World War I these voluntary systems had a considerable coverage and yielded a wide distribution of unemployment benefits in bad years, but in no country did they cover even half the industrial wage-earners.

Following the establishment of the voluntary plans, a movement began to develop for national unemployment insurance. As early as 1894 an attempt was made to establish a compulsory unemployment insurance system in the Swiss canton of St. Gall, but it soon failed. The first real achievement was made by Great Britain in 1911 when the first national compulsory system in any country was established. No other country followed Great Britain until eight years later when Italy established compulsory insurance. Germany enacted a compulsory unemployment insurance law in 1927.

Unemployment Insurance in the U.S.: Wisconsin enacted a state unemployment insurance plan in 1932 in response to the Great Depression, when more than 25 percent of the adult workforce was unemployed. Although the depression increased interest in unemployment compensation, it had been established in the United States on a voluntary basis to some extent long before. As elsewhere, its beginnings date back to the out-of-work benefit systems undertaken by the trade unions.

Although the first union plan in this country was established as early as 1831, less than 100,000 union members were covered by unemployment benefit plans in 1934. Several unions, chiefly in the garment trades, reached agreements with the employing firms, which included provisions for guaranteed employment, and unemployment benefit plans. At their height these joint plans covered slightly more than 65,000 workers.

The hazard of unemployment is one of the most serious confronting wage earners in an industrial society. As our economic life becomes more complex and industry more interrelated, economic maladjustments are felt more and more deeply throughout the country. Although we have no accurate measure of unemployment, all available information indicates that no year in the past half-century has been free from unemployment. Even in good times a large number of employable persons are unemployed each year. With returning prosperity now in the offing, nothing should obscure the fact that unemployment was not created by the depression, nor will it disappear with recovery. Unemployment is a continuing problem of modern society and must be met by a continuing program.

The Great Depression Era: During 1929, the year of our most marked prosperity, there were at least 1,800,000 unemployed workers in the United States. Even if American business could at once return to its 1929 status, there would still remain a body of unem¬ployed workers nearly as large as that in Great Britain at the time of its most intense depression. It is clear, therefore, that unemployment caused by cyclical business fluctuations, such as we have recently witnessed, is not the only type with which we have to deal. Seasonal unemployment, technological unemployment, and many other types of unemployment will continue, even in prosperity, to threaten the welfare of our population and the stability of our social structure. It is important now to provide a plan for compensation to alleviate the effects of unemployment in normal times, to bridge the gap from one period of employment to another. The new problem of the permanently unemployed which has been bequeathed to us by the depression cannot be solved by unemployment compensation. Of those now unemployed, it is feared that, even when business rises again to 1929 levels, four or five million will remain permanently without work. Relief measures would appear to be the only method of caring for these people, yet the costs of unemployment relief will reach staggering heights if we attempt to use only this form of aid for those who currently lose their jobs.

Sample turnover figures show that, even now, when total employment is increasing, 3.56 workers are “separated” every month for each 100 industrial jobs. This means that, in American factories alone, 285,000 workers each month, or over 3,000,000 each year, have to seek new jobs and are at least temporarily unemployed. Although many of them may be successful after a brief search, it is inevitable that many others will remain without work for sizable periods… It is often asked if we can afford unemployment compensation, if industry now struggling out of the depression can bear a further handicap. Such a question is quite misleading because it obscures the fact that it is unemployment itself, not unemployment compensation, which is expensive. Unemployment is incalculably expensive. Its cost to workers, to business, to government, and society at large can hardly be exaggerated. But unemployment compensation is not expensive. It simply brings out into the open and more equitably distributes a part of the unavoidable cost of unemployment. This part of the cost, further, is levied at a time when it can most easily be borne.

Since returning prosperity will tend again to lull us into a false sense of security and indifference to the problem, it may be advisable to recall the successive stages in the recent development of our attitudes to this problem. First, we denied that there was or could be any unemployment. Second, we admitted the fact of some unemployment but denied that it was serious. Third, we conceded its seriousness but contended that it would and could be relieved by private charity, even though local public relief was already carrying the greater part of the burden. Fourth, the increasing pressure on State and local finances forced us to accept a policy of Federal relief or work relief, in the belief that only a temporary adjustment to a passing emergency was necessary.

During the depression the Federal Government spent about $7,000,000,000 on its relief and work relief programs. In addition, State and local governments spent about $1,500,000,000. The burden of unemployment relief was beyond the capacity of most local governments and was a major reason for recent Federal deficits.

There is a fifth step which was greatly stimulated by the passage on August 14, 1935, of the Social Security Act. This step was the enactment by States of laws to protect their industrial and commercial workers against some of the hazards of involuntary unemployment. As far back as 1916 the first bill for unemployment compensation was introduced in a State legislature; in 1920, 22 bills were introduced in five State legislatures, and in 1932 the first unemployment compensation law was passed in Wisconsin.

On December 31, 1936, 35 States and the District of Columbia had, by the passage of unemployment compensation laws, taken this final step abandoning our reliance on relief doles and adopting in their stead the common sense device of unemployment compensation. For it is surely nothing but common sense to set aside by contributions, during periods of employment and prosperity, a fund out of which, during subsequent unemployment, benefits may be paid to insured workers. Unemployment benefits, guaranteed in advance, certain in amount, paid out of a fund built up by orderly and systematic means, are clearly more businesslike than any form of haphazard relief, hastily set up and financed in the midst of a crisis. Such a program gives all workers a sense of security. It decreases the fear of unemployment which hangs like a cloud over all workers. To the extent that the fear of unemployment can be decreased, productive efficiency, as well as personal well being, will be increased. The increase in efficiency might easily more than offset any premium cost.

Early Legislative History

Legislative efforts for unemployment compensation have lagged behind the voluntary efforts of employers, trade unions, and employers and employees acting jointly. Following the depression of 1914-15, the first attempt to obtain an unemployment compensation law was made in the United States, when a bill was introduced in the Massachusetts legislature in 1916. The bill was modeled on the British act of 1911 in that it required contributions from employees, employers, and the State government, but even at that early date preparation was made for future developments by relating contributions and benefits to wages. No action was taken and it was not until the depression of 1920-22 that once more unemployment compensation bills were introduced in the State legislatures of Connecticut, Massachusetts, Minnesota, New York, Pennsylvania, and Wisconsin. Only one of these, the bill introduced in New York in 1921, followed the 1916 Massachusetts bill. The others were modeled after the Huber bill, drafted by Professor John R. Commons of the University of Wisconsin and first introduced in the Wisconsin legislature in 1921. This bill applied the principles of American experience with workmen’s compensation to the relief of unemployment. The cost was to be borne entirely by the employer, in order to force him to stabilize his employment. The insurance was to be carried with a mutual company under the control of a compensation insurance board which was to classify industries according to their risk. In modified forms the bill was introduced at every meeting of the Wisconsin legislature until an unemployment compensation bill was finally passed.

Little real interest developed during the period of comparative prosperity, but with the onset of the depression interest again quickened. In 1931 alone, 52 bills for compulsory unemployment compensation were introduced in States… These were based largely on the Wisconsin unemployment reserve plan. Various State commissions in California, Connecticut, Illinois, Maryland, Massachusetts, New Hampshire, New York, Ohio, Pennsylvania, Virginia, and other States have studied the problem.

Origins of a Federal-State Plan: On January 29, 1932, after more than two years of severe depression, a law was passed in Wisconsin. Its passage greatly stimulated thought about unemployment compensation. Based on the theory that the employer was responsible for unemployment, it assessed the entire cost on him on the assumption that if he bore the cost of the system, he would make every effort to stabilize employment and thereby prevent unemployment. The law provided for the establishment of individual reserve funds, a provision that did not appear in the original Huber bill. Contributions of each employer were to be kept separate and available for benefits only to his unemployed workers. The Governors’ Interstate Commission on Unemployment Insurance, on the initiation of President Roosevelt, then Governor of New York State, early in 1931 reported in favor of a bill very similar to the Wisconsin law. This commission consisted of representatives of New York, Massachusetts, Ohio, New Jersey, Pennsylvania, and Connecticut. The American Association for Labor Legislation, first in 1930 and later in 1933, prepared an “American plan” which, like the Wisconsin law, laid its emphasis on reserves rather than insurance and on prevention rather than relief, although it provided for industry reserves rather than individual employer reserves.

Although the Wisconsin law greatly influenced legislation in this country, equally important was the report of the Ohio advantage in competing with employers in States that had no laws. Since this was in effect an interstate problem, its solution required Federal action.

Once the committee was convinced that the problem of unemployment compensation was the direct concern of the Federal Government, the next approach was to determine what the role of the Federal Government should be.

Should it establish a compulsory national system of unemployment compensation or should the Federal Government confine its activity to promoting State action and developing a Federal ¬State cooperative system? A Federal plan which would set up a complete system for the administration of unemployment compensation specifying all benefit conditions had much to recommend it. It offered a chance for the pooling of the risk of unemployment over an area wider than could be possi¬ble under State action. It would have made possible the maintenance of a fund on a more strictly actuarial basis, since the paucity of State statistical information would necessitate pooling all available data to obtain anything like a sound factual background. It would have given uniformity of protection to all employees in the United States exposed to the same risks of unemployment and an easy and readily available way of handling the problem of interstate employees, a problem impossible of solution by individual State action alone and difficult even in a Federal-State system. Such plan would probably have the approval of the large employers of the country whose operations cut across State lines an who would be definitely opposed to the necessity for fun tinning under many different State regulations.

On the other hand, against these considerations was weighed the claim that an exclusively Federal system would result in a centralization of administrative functions which might paralyze action. There was the fear that, in such set-up, bureaucratic methods might flourish. In the absence of experience with unemployment compensation in t country, it was thought that it would be desirable to all wide latitude for experimentation, in the hope that this would provide uniformity where essential and diversity where desired. This, it was felt, could best be accomplished by a Federal-State cooperative system under which the Federal Government would assume the leadership by removing the disadvantages in interstate competition which would have resulted from purely State legislation. Although recognizing the need for uniformity in State action, it was felt that such uniformity could best be accomplished through voluntary State action encouraged by the Federal Government.

Two types of Federal-State cooperation were given con¬sideration: a subsidy plan under which the Federal Government would grant funds to the States if they passed laws which complied with definite Federal standards, and a credit-offset plan under which a Federal tax would be levied on all employers and a credit against the tax allowed to all employers who contributed to State unemployment compensation funds. Both these Federal-State cooperative systems contemplated that the Federal Government would impose a uniform excise tax on pay rolls and that the States would pass unemploy¬ment compensation laws. Under the subsidy plan the entire amount of Federal tax was to be collected by the Federal Government and a Federal grant distributed to States enacting unemployment compensation laws which complied with standards prescribed in the Federal act. The advocates of the subsidy procedure argued that the standards in the Federal act would result in uniform State legislation; that it would provide a means for uniform recording of statistical experience and other information necessary for national study of the problem and for benefit payments, regardless of the workers’ mobility. It was felt, however, that the States might constantly look to the Federal Government to increase the grant since they had no part in the collection of contributions or the Federal tax and that the State laws would be too dependent on Federal legislation.

The second type of Federal-State system was the credit offset plan, providing for a Federal tax levied on the pay rolls of all employers and a credit up to 90 percent of the tax allowed for contributions paid by employers into a State unemployment compensation fund. This contemplated that the Federal Government would not attempt to regulate in detail what the States should include in their unemployment compensation laws. It would not set up a Federal system of unemployment compensation but would make it possible for the States to pass laws. It would permit complete freedom to the States as to the type of State law to be adopted, the length of the qualifying period, benefit rates and duration, waiting periods, claims procedure, and all the other substantive provisions; but at the same time it would provide for an equal burden on all employers by the imposition of a Federal pay-roll tax. Uniformity was also to be obtained to the extent that contributions could be expended solely for benefit purposes and by the deposit of State funds in the Federal Treasury. Like the subsidy plan, it provided for Federal supervision, but permitted far more local responsibility through State collection of contributions, payment of benefits, and development of all the details of the law in the States, thus utilizing the traditional American methods and local machinery in the administration of labor laws. Although the subsidy plan could operate only if it received an adequate annual appropriation by Congress, the credit-offset device provided that, since contributions were collected directly by the State, administration would not depend so completely on Federal action. In this connection, it was assumed that there would be no pressure for increased expenditures by the Federal Government since benefits came solely from contributions paid into the State fund.

The tax-offset method was finally incorporated in the unemployment compensation provisions of the economic security bill which was introduced by Senator Wagner and Representatives Lewis and Doughton on January 17, 1935. The bills were referred in the House to the Committee on Ways and Means and in the Senate to the Committee on Finance. Hearings were begun almost immediately. Testimony was received from labor-union officials, industrialists, prominent citizens, and experts in the field, and careful and prolonged consideration was given the bill. The volume of hearings ran to 1,141 pages in the House and 1,354 pages in the Senate. In a revised form the social security bill came up for consideration in the House of Representatives on April 11 under a rule permitting complete freedom of amend¬ment. Debate lasted until April 19 when the bill was passed by a vote of 372 to 33. Following passage in the House, the Senate Finance Committee considered it during 2 full weeks in May and reported it favorably, with amendments, on May 20. The Senate debated the bill from June 14 to June 19, when it was passed by a vote of 77 to 6. In both Houses, an overwhelming majority of both parties supported the measure. Following a period in which both Houses tried to adjust their differences, the conference committee’s report was adopted in both Houses without even a roll call, in the House on August 8 and in the Senate on August 9. On August 14, 1935, the President approved the Social Security Act, which became effective immediately.

It seems absurd that anyone today should question the need for unemployment insurance laws. The question of public policy is now one of the particular type of law to be adopted. The Security Act has provided an adequate foundation upon which to build greater protection against the risks of industry for the American people. It will in a short time do away with the worst features of our antiquated relief methods and provide for our citizens in a manner worthy of a rich and generous nation.– William Haber, from broadcast speech, October 25, 1936: The Social Security Act, A Discussion of Some of the Criticisms.

Our Federal/State System of Unemployment Insurance: The passage of the Social Security Act marked the beginning of a new era in our social policy. The act, which is divided into eleven titles, attempts to offer protection against many of the major hazards of modern economic society. Federal aid is granted to the States for the needy aged, for dependent children, for the blind, for maternal and child welfare, for vocational rehabilitation, and for public health work. A national system of old-age benefits is provided. The Federal Government for the first time, on a Nation-wide scale, made an effort to aid in providing some reasonable degree of economic security during unemployment-other than on a relief basis-for those who ordinarily were employed. Titles III and IX of the act deal with unemployment compensation. They do not set up a Federal system of unemployment compensation but make it possible for the individual States to establish their own plans of unemployment compensation by removing the major obstacle of interstate competition. Title IX levies a pay-roll tax of 1 percent in 1936, 2 percent in 1937, and 3 percent in 1938, on employers of eight or more persons. Certain employments are excepted from this tax, such as services in the nature of agricultural labor, domestic service in a private home, shipping on the navigable waters of the United States, service in the employment of one’s immediate family, Government service Federal, State, and local-and service for certain agencies operated on a nonprofit basis. The tax is based upon the wages payable for services not excepted above and is collected by the Bureau of Internal Revenue of the Treasury Department. One of the results of the tax levied equally upon employers throughout the country is to remove a major obstacle to State action, for all employers are affected substantially the same, whether or not the State passes an unemployment compensation law.

Against the Federal tax, the employers may credit the amounts which they contribute to unemployment compensation funds under a State law approved by the Social Security Board, but such credit may not exceed 90 percent of the Federal tax. In other words, if a State passes an unemployment compensation law that is approved by the Social Security Board, the employers of the State instead of paying the entire Federal tax, pay only 10 percent into the Federal Treasury, while the rest remains in the State fund for the payment of benefits to the eligible unemployed population of the State.

In order to be approved by the Social Security Board, the State unemployment compensation law must include provisions that:

(1) All benefits shall be paid through public employment offices, or such other agencies as the Board may approve;

(2) No benefits shall be paid for unemployment occurring within 2 years after the first day with respect to which contributions are first required;

(3) All contributions to the State fund shall be immediately transferred to the unemployment trust fund of the United States;

(4) Money withdrawn from the unemployment trust fund shall be used only for the payment of benefits;

(5) Benefits shall not be denied any otherwise eligible individual for refusing to accept any work vacant due directly to a trade dispute; if the wages, hours, or other conditions are substantially below those prevailing for similar work in the locality; if as a condition of being employed a worker has to resign from or refrain from joining a labor organization or would be required to join a company union;

(6) The State law must provide that no vested rights are created which prevent modification or repeal of the State law.

These requirements do not prescribe the fundamental provisions of a State unemployment compensation law but are intended merely to define a genuine unemployment compensation law as distinguished from relief and to safeguard the solvency of the fund and prohibit use of the funds to lower labor standards. Definitions of who shall contribute to the State fund, the amount and duration of benefits, eligibility requirements, and similar questions, are all left entirely to the discretion of the States in formulating their own laws.

Every genuine unemployment compensation law provides that benefits shall be paid through public employment offices in order that public control shall attend the payment of benefits, and only persons genuinely unemployed and unable to obtain work shall receive benefits….

Source: Larry DeWitt, “Review: Protecting Soldiers and Mothers: The Political Origins of Social Policy in the United States by Theda Skocpol,” December 2003.

2 Replies to “Social Security: Unemployment Insurance”

  1. Unemployment Insurance: A 79-Year Old Promise to American Workers That Needs Renewing - Full Reading says:

    […] earliest unemployment insurance programs were established by trade associations; association members paid into a private fund that would help support them when they were out of […]

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