The Committee on Economic Security (CES)

“Social Security In America”

Part I

UNEMPLOYMENT COMPENSATION

The basic data for part I are drawn from staff reports on unemployment compensation
by Bryce M. Stewart, Merrill G. Murray, W. R. Williamson, actuary, and Fred Jahn, statistician

Ed. Note: This report was prepared for the benefit of members of the Committee on Economic Security in 1934.  It reveals the history, the experience of other nations and the relationship of Unemployment Compensation to other programs designed to provide security against the hazards of unemployment.

Chapter I

INTRODUCTION

THE HAZARD of involuntary unemployment is one of the most serious and disastrous of the many risks which confront wage earners in an industrial society. Industry moves through alternating periods of prosperity and depression which introduce serious employment risks; workers, because of conditions entirely beyond their control and largely beyond the control of the men and institutions which employ them, are from time to time deprived of all sources of income. Under normal conditions the period of unemployment is rarely of long duration for those workers who are not handicapped by old age or ill health. But even for relatively short periods the results of unemployment can be devastating. Savings, if any have been accumulated, are exhausted; living standards sink to a lower level; and the nutritional and health needs of the family are neglected. Ever since the industrial revolution in the early eighteen hundreds, large-scale efforts toward public relief have been periodically necessary to provide for thousands of wage earners who have become involuntarily unemployed.

The unprecedented extent and duration of unemployment in the United States since 1930 has left no one who is dependent upon a wage or salary untouched by the dread of loss of work. Unemployment relief distributed as a form of public charity, though necessary to prevent starvation, is not a solution of the problem. It is expensive to distribute and demoralizing to both donor and recipient. A device is needed which will assure those who are involuntarily unemployed a small steady income for a limited period. Such income, received as a right, is provided by an unemployment insurance or unemployment compensation system. Even though it cannot offer complete protection of the wage earner’s income during periods of severe industrial retrenchment, and even though it cannot maintain benefits which will equal normal wages in amount or duration, unemployment compensation serves to lessen the immediate effects of a major depression and to prevent its cumulative results.

Unemployment insurance has already been tested abroad and found a valuable aid to the industrial system. It will be of interest to trace its evolution and development over nearly a century and a half.

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THE EVOLUTION OF UNEMPLOYMENT INSURANCE

Like many other forms of social insurance, unemployment compensation had its origins in trade-unions and mutual-benefit societies, where pooled periodic contributions of members were used to pay out-of-work benefits to those who were unemployed. Group action to protect workers against the new hazards of industrial life began as early as 1789 when Basel Town in Switzerland established an unemployment insurance plan which lasted for several years before it went out of existence. In England in 1824 the Journeymen Steam Engine Workers’ Society distributed out-of-work benefits to its unemployed members, and in Brussels the Printers’ Union adopted a system of traveling benefits for members in 1846. In all countries government legislation an unemployment compensation has followed experimentation by trade-unions. Union experience with unemployment funds, though limited in scope and effectiveness, developed a code of practice which was largely adopted later when public authorities established unemployment insurance schemes.

The union schemes failed to reach the large portion of unorganized workers of the lower-paid and unskilled type, who, in periods of unemployment, were forced to depend on the charity dispensed by public poor relief and private organizations. Therefore the next step in the evolution of unemployment insurance was the establishment of municipal, provincial, and national government subsidies to voluntary benefit plans organized for nonunion workers. Berne, Switzerland, was the first city to inaugurate this plan which was started in 1893. Basel and Zurich followed suit, and similar municipal funds were created in Cologne, Germany, in 1896, in Leipzig in 1903, and in Bologna, Italy, in 1896. These funds had the disadvantage of attracting primarily workers engaged in occupations which were subject to irregular employment. The funds became unduly loaded with bad risks and most of the schemes were shortly abandoned.

Several cities tried the experiment of subsidizing unemployment funds of trade-unions. Dijon and Limoges, France, in 1896 and 1897, respectively, were the pioneer cities in this approach, and in 1901 Ghent, Belgium, established a system of direct subsidies to trade-union members under the administration of a communal unemployment fund. The Ghent system was adopted by several cities in Germany (Strasburg in 1907; Muhlhausen, Erlangen, and Mainz in 1909) and in two Italian cities (Milan in 1905; Brescia in 1909). It was widely adopted in those countries which developed voluntary systems and still forms the basis of these systems.

The Ghent system provided a fixed amount of benefit to each unemployed worker in addition to the amount which he received from

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the union. The subsidies were granted annually and were computed on the basis of benefits paid in the previous year. No provision was made for the accumulation of reserves, and in depression years the union funds were forced to bear a larger proportion of expenditures for benefits than in other years. Liege, Belgium, in 1909 established a different basis of subsidy, with a subvention which was related to the amount of member contributions to the union as well as to benefits paid. This municipal subsidy was paid to the unions rather than to the unemployed workers. The Liege plan was not so widely adopted as the Ghent system.

Several of the provinces in Belgium and a number of the Swiss cantons began to add their subsidies to those of the municipalities. The first participation by a national government was in 1905 when France passed a law providing for a national subsidy to voluntary unemployment funds. With the outbreak of the World War these various European voluntary systems had considerable coverage but probably failed to apply to half the industrial wage earners in any of the countries where they were in operation. Since they were purely voluntary schemes and since they were limited to union members, they left large numbers of nonunion workers unprotected.

With the failure of the voluntary plans for nonunion workers established during the period 1890-1905, compulsory insurance against unemployment was attempted. The first compulsory plan on record is one established in St. Gall, a Swiss canton, as early as 1894. By a cantonal order municipalities were empowered to establish compulsory insurance for workers receiving less than a stipulated wage. The municipality of St. Gall, acting on this authority, established a fund in the following year. Workers were required to pay contributions in proportion to wages and their benefits were graduated in proportion to contributions. After 2 years of operation the fund ceased to function, largely because of the unwillingness of the more regularly employed workers to contribute.

The idea of compulsory insurance after this brief experience seems to have been abandoned until it was revived in Great Britain a decade later in discussions of the inadequacy of the poor laws. The administrative machinery of a national system of employment exchanges was set up in 1909 and the first national compulsory unemployment scheme was established in 1911. It applied to six industries and covered about 2,500,000 workers. The scheme was extended in 1916 and again in 1920, when it covered practically the entire wage-earning population of the country except farm workers and domestic servants.

Following the example of Great Britain, seven European countries established nation-wide compulsory unemployment insurance. These

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countries and the dates of enactment of their laws are as follows: Austria, March 24, 1920; Bulgaria, April 12, 1925; Germany, July 16, 1927; Irish Free State, August 9, 1920; Italy, October 19, 1919; Poland, July 18, 1924; Yugoslavia, December 15, 1935. In addition Queensland, Australia, enacted a compulsory insurance law on October 18, 1922. Thirteen cantons of Switzerland also have such legislation, the first of which was passed in 1925. ( See table 1. ) Canada on June 28, 1935, enacted a compulsory unemployment insurance law to cover the entire dominion (see appendix VI).

In the United States, Wisconsin enacted a law for compulsory unemployment compensation on January 29, 1932, which began to operate on July 1, 1934. Utah, Washington, New York, New Hampshire, California, Massachusetts, the District of Columbia, Alabama, and Oregon enacted compulsory legislation during 1935. Eighteen States had similar bills before their legislatures during that period.

Eleven European countries have unemployment insurance systems in operation under which government subsidies are paid to voluntary plans. These countries and the dates of enactment of their laws are: Belgium, December 30, 1920; Czechoslovakia, July 19,

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1921; Denmark, April 9, 1907; Finland, November 2, 1917, repealed in 1934 and substitute legislation enacted in 1934; France, September 9, 1905; Greece (date not available) ; the Netherlands, December 2; 1916; Norway, August 6, 1915; Spain, May 25, 1931; Sweden, June 15, 1934; and 12 cantons of Switzerland, October 17, 1924. (See table 2. )

Accurate estimates of the total number of workers covered by the various compulsory and voluntary unemployment insurance laws are impossible to assemble since during the prolonged unemployment of recent years many persons have exhausted their rights to unemployment benefits. The estimates for 1935 shown in tables 1 and 2 place the number insured under compulsory systems at 43,670,000 and the number insured under voluntary schemes at 4,161,000.

Only one country which has enacted nation-wide compulsory insurance against the hazards of unemployment has ever revoked the act. Rather, the tendency has been to extend the coverage of compulsory systems to larger groups of workers. Russia, the one country which has repealed unemployment insurance legislation, is reported to have taken this step because unemployment no longer existed.

The present depression has proved a severe test of unemployment insurance systems. The chief difficulty has been that, as unemployment became more and more extensive, workers exhausted their rights to benefits and were obliged to seek public relief. The magnitude of the relief problem has demanded funds beyond the resources of local governments. As a result, national governments

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have, of necessity, assumed responsibility for the provision of work relief and direct relief. Reliance on insurance principles has in consequence been shaken; workers who had contributed to the insurance fund were allowed to draw on the fund beyond the time limit set in the original law if they had no means of subsistence. Thus an intermediary stage between insurance benefits and poor relief was introduced, the insurance fund financing benefits on a needs basis.

During this emergency period little attention has been given to the possibility of using the insurance system as a vehicle for prevention of unemployment, since this problem was overshadowed by the need for providing relief for those who were out of work. The necessity for large government subsidies to the insurance system has had the following results: the control of unemployment insurance and relief measures has been centralized; systems of public employment offices have been developed, strengthened, and centralized; and the tendency toward nation-wide compulsory legislation rather than local voluntary measures for unemployment insurance has received considerable impetus.

The optimism of a growing country, the long predominance of agriculture, and the relative breadth of employment opportunity have been factors in the slow development of an attack on unemployment in the United States. Here until 1932 all plans were entirely voluntary and, as in other countries, trade-unions were the initiators of the movement. Although the first union plan was established as early as 1831, less than 100,000 union members were covered by unemployment insurance reserves in 1934, some of which were supported by employers or jointly by employers and union members. Recurrent depressions in the last 20 years stimulated a few companies to initiate schemes which together affected about 88,000 employees, approximately two-thirds of which were in a single company.

INSURANCE PRINCIPLES IN UNEMPLOYMENT COMPENSATION

All forms of insurance represent attempts to evaluate the extent of loss incurred through commonly recognized contingencies (death, accident, fire, illness, invalidity, or unemployment) and to devise a scale of compensatory payments which shall be at least a partial restitution of the loss. Successful application of the insurance principle necessitates a fairly accurate measurement of the risk to be incurred, a pooling of reserves to meet the risks, and a scale of benefits which are calculated to maintain the solvency of the funds. The risk concept of insurance involves the coverage of many persons

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under a single plan in order to reduce the cost of meeting the risk. Small periodic payments on behalf of a large number of persons, many of whom will not experience the catastrophe for which insurance is carried, are necessary to provide adequate financial resources which will afford compensation for the persons who suffer the catastrophe. Certain people will be less subject to the contingency than others, but the mechanism of shared risk is necessary to carry out the purposes of insurance. There is less variance from expected experience in a large exposure than in a, small group.

Certain basic concepts determine whether the unemployed are to be provided for under an insurance system or a plan of public aid or out-of-work donation. An application of the insurance principle in unemployment compensation means that an employee who fulfills certain qualifying conditions becomes eligible for inalienable contractual rights. These rights are measured by computations of the incidence and duration of unemployment over a secular period, and over this period a balance is maintained between the income and expenditures of the fund. Large reserves must consequently be accumulated in good years if the anticipated drains of poor years are to be met.

In one sense unemployment “insurance” might be considered as devoid of humanitarian motives. Its structure would merely represent statistical answers to such a question as “given an expectancy of x periods of unemployment and of y weeks’ duration during a specified period, how much will it cost to provide z weeks of benefit at so many dollars per week?” This cost, when computed, is merely figured in terms of weekly assessments upon the contracting individual.

Data are not available in this or any other country to compute accurately any of the factors in the equation. Even life tables of insurance companies are revised periodically to allow for differences in population characteristics and health conditions, as well as the progress of medical science. A purely insurance principle as a basis of an unemployment system would need constant revision with the accumulation of experience. These revisions would, however, be legally applicable only to new contracts.

The policy underlying an unemployment compensation plan determines to what extent insurance principles will be maintained. If the policy is to emphasize protection against seasonal and technological unemployment, with little attempt to accumulate reserves for periods of extended unemployment, insolvency of the fund is inevitable when a major depression occurs. This course may be deliberately chosen in the interests of providing more adequate protection in normal times. The maximum duration of benefits

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provided is in this case adjusted to short periods of experience (2 or 3 years), the exigencies of a major depression are left out of reckoning, and a pay-as-you-go principle adopted. When a fund of this character is faced by a period of severe unemployment, contribution and benefit rates must be adjusted, or the government must provide a subsidy or loan to meet the deficit incurred by maintaining higher benefit rates than the income of the fund would warrant. Reduction of benefits and increase of contributions meet with great opposition in periods of depression, hence resort to loans or government subsidy is the usual result of a compensation system of this kind.

A closer approximation to genuine insurance is possible if an unemployment compensation plan can be computed statistically on the basis of the experience of a business cycle, and as such cover a major depression as well as the minor fluctuations of employment. This basis establishes lower benefit rates and less liberal provisions with respect to qualifications than are possible when the experience of a major depression is ignored. Yet, basically, even this type of unemployment compensation plan cannot be termed pure “insurance”, since its benefits are not granted on a mathematical basis as to amount and duration. Social good is placed above individual right, so that some classes of workers may be favored. For example, seasonal workers may be allowed to draw disproportionately on the fund, or a minimum benefit may be provided for the lower-paid worker and a maximum benefit for the higher-paid worker. Similarly workers with very long records of employment may not receive the full proportion of the contributions accumulated on their behalf even if additional credit is given them for long periods of steady employment under this system. Furthermore, the impossibility of accurately predicting rates of unemployment, particularly in severe depressions, may make it impossible to maintain indefinitely even this type of plan on a solvent basis without adjustment of benefit rates and contributions or by government loans or grants.

Most European countries, concerned with protection against unemployment rather than prevention, have provided for a wide pooling of risks. When in 1920 Great Britain extended unemployment insurance to practically the entire industrial population, the system adopted was a national pool. All contributions, whether received from England, Wales, Scotland, or Northern Ireland, were placed in one fund. It was provided, however, that industries submitting approved schemes might be permitted to operate them independently of the main system, and it was contemplated that perhaps one-third of the insured population might ultimately be covered by such plans. After the banking and insurance industries had established their own unemployment insurance systems, or “contracted out”, the

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privilege was withdrawn because of the high post-war unemployment rate, the persistence of which prevented any restoration of the original provision.

In contrast to the broad national pooling of risks in Great Britain, Germany in 1927 adopted a system which allowed the pooling of widely divergent risks by regions which cut across state lines. It was thought that this procedure would stimulate competition among the regional areas for reduction of the extent of unemployment with consequent lowering of contributions. The continuous high unemployment rate necessitated withdrawal of this provision, however, and Germany has actually pooled her resources in a manner similar to that of Great Britain.

In Belgium, because of its strong trade-union organization, unemployment insurance was initiated mainly by funds of small local unions. In part, the need for pooling of risk forced amalgamation of many of these funds into national organizations, and in 1920 the post-war unemployment situation prompted the Government to weld these units into the semblance of a national system with provision of national subsidies for further assistance during depressions. The assistance from the Federal treasury has recently been increased and control of all money centralized.

The experience of these three countries shows the necessity of wide application of the pooling principle, especially in periods of serious unemployment. In the absence of any form of adequate reserves the British and German limitations on pooling had to be withdrawn, and in Belgium the granting of subsidies from an emergency fund largely amounts to national pooling.

The social value and the practical simplicity of pooling the risk points to this method as the most desirable. At present adequate data are not available for differentiation among risks. Any attempt at establishing preferential rates for groups with the most favorable experience, or “merit rating”, will create problems. The major danger will be that too great credence may be given to inadequate experience. Furthermore, the use of smaller units of coverage will tend to immobilize considerable portions of the general funds so that, while not needed by some of the units, they will not be available to other units with an adverse experience. To give adequacy of provision in, separate funds, therefore, higher rates of contribution are required than if a comprehensive pool is provided. Certainly any limitation on the pooling principle must be carefully considered.

Unemployment compensation cannot protect the insured population against the entire risk of unemployment. It must be considered only as the first line of defense. Recognition of the need for social

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insurance in the United States and other countries had its origin in a desire to segregate the risks of dependency from poor relief in general and to provide separate treatment for special problems. The risk of unemployment must similarly be broken down and its different parts must be given specialized treatment. Unemployment compensation must then be limited by strict definition to those persons who are ordinarily employed with a fair degree of regularity. Efforts to extend an unemployment insurance scheme beyond these proper limits have invariably converted it into a relief measure and brought it into disrepute.

Recognition of the limited function of unemployment compensation and the desirability of providing–outside of the insurance system–for those on the borderline of insurance and relief is the basis of the British Unemployment Act of 1934. Under this legislation unemployment insurance was restored to the original conception underlying the acts of 1911 and 1920, and transitional payments–the last of a long series of post-war provisions for benefits to those on the borderline of insurance and relief–were definitely severed from unemployment insurance. Transitional payments, linked to the insurance system, were replaced by a system of unemployment allowances administered by a new national agency on a basis slightly different from that of the former transitional payments. This change was effected by restricting unemployment benefits to a limited period and to those with a specified minimum of previous insured employment; at the same time, an independent system of unemployment allowances was provided for those who lacked the requisite amount of previous insured employment to qualify for benefits, for those who had drawn the maximum number of weeks of unemployment benefits permitted, and for a limited group of persons not covered by unemployment insurance. Unemployment allowances differ fundamentally from unemployment benefits in that they are not available as a contractual right but are given only on the basis of need to applicants who have passed a “means test.” The disqualifications also differ somewhat, but in the case of both unemployment allowances and unemployment benefits applicants must be registered for work at public employment offices and are disqualified when unemployment is due to a trade dispute. Financing also differs; unemployment benefits are jointly financed by the worker, the employer, and the National Government; unemployment allowances are entirely financed from public funds.

Unemployment allowances are administered by a new national authority–the Unemployment Assistance Board–which has largely taken over the functions performed by the local poor-law authorities in assessing need in connection with the earlier, temporary plan of

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transitional payments. The relief aspect of unemployment allowances is evident in the detailed formulas for assessing need and in the disciplinary powers given the board for certain “difficult” cases, disciplinary powers which approach those exercised by the poor-law authorities in granting “out-door” relief to the able-bodied unemployed.

The Germans, too, felt that unemployment insurance could not cover the entire problem of unemployment. Setting up their scheme from the vantage point of more than a decade and a half of British unemployment insurance experience and after 9 years’ experience with national unemployment relief, their approach consisted of a coordinated system including three kinds of protection: (1) unemployment insurance, financed from joint contributions of employers and employees, with limited benefits on a contractual basis for a specified period; (2) an emergency benefit scheme, providing benefits, financed four-fifths by the Federal and one-fifth by the local governments and applicable to those insured persons who had either exhausted their rights to insurance benefits or who had not yet qualified for them and who were in need; (3) beyond these two, a local relief system, first established in 1924, which assured maintenance to all needy persons who were willing to work. This relief system was designed for the care of the unemployables rather than the able-bodied unemployed.

After more than two decades of experience with unemployment insurance, the fact has finally been established, as the new British law recognizes, that a sound system must have strictly defined limits that an insurance scheme must serve merely as the first line of defense, to be supplemented by other measures for able-bodied unemployed ineligible for statutory benefits.

RELATION OF UNEMPLOYMENT INSURANCE TO OTHER
PROTECTIVE MEASURES

The various expedients to provide security against the hazards of unemployment, accidents, illness, and old age are interrelated from the standpoint of the employer, the employee, and society itself. So far as costs are imposed upon the employyer, they all represent to him an increase of the labor cost of production. From the standpoint of the employee, each form of protection adds to his total measure of security. From the standpoint of society, they have an essential unity in that they sustain purchasing power, afford protection against destitution, and so promote economic and social stability.

It is inevitable that if protection is not afforded for all the industrial hazards, any one specific system will be made to carry some

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of the burden of the other risks unprovided for. This is especially true during a period of industrial depression when the fact of unemployment impels many workers to make undue claims on other insurance funds if no unemployment insurance benefits exist. This principle is evident even in the limited American experience; Murray W. Latimer found in his study of industrial old-age pensions that the number of pensioners in some American companies rose almost 50 percent in the single year 1931, and in all companies by probably 14 percent. In short, with unemployment increasing during the depression, many workers were pensioned who would have been entitled to unemployment benefits if such a system had been in existence. Experience with the Ohio workmen’s compensation fund in the depression years 1931-33 bears out this point. Increased unemployment brought increased claims on the fund and a greater number of revived compensation claims. During the year 1931-32 the cost of compensation exceeded that of any previous year. The catastrophe and general surplus fund which amounted to about $3,250,000 in 1931 fell to approximately $115,000 in August 1933. It was shown that in a prolonged compensation case the medical cost per claim during the second year of treatment was 67 percent higher in 1931 than in 1925, about 50 percent higher during the third year of treatment, and 150 percent higher in the fourth. With a system of unemployment insurance in operation, some of the risks now falling on workmen’s compensation and industrial pensions in the United States would be removed, and the real cost of each of these types of compensation would be more properly allocated.

In the absence of a health-insurance system which provides benefits to compensate for a portion of the income loss resulting from illness, a worker who has been out of work because of illness may consider himself unemployed and claim benefits from the unemployment compensation system. Similarly, protection against old-age dependency is needed to prevent an unemployment compensation system from compensating for old-age risks which are outside its compass.

In Europe the different types of social insurance have developed separately and have only recently begun to be considered in their interrelationships. Under the German system, the unemployment insurance fund maintains the status of an unemployed person in the o1d-age, invalidity, and health-insurance systems. An unemployed worker receives in sick benefits the same amount that he would receive in unemployment benefits, so that he may not have a special advantage in either. When the system of sickness insurance in Germany was paralleled by a plan of unemployment insurance, expenditure on sick benefits was considerably reduced. In France,

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too, the recent social insurance scheme made integrated provision for all the economic risks, except that of unemployment, but special provision was made to keep employees in good standing in the other social insurance systems when unemployed.

Quite recently thought has been directed in this country to the integration of all these measures into a broad program for economic security. The widespread unemployment that has characterized this country during the depression has prompted the view that direct assistance for the unemployed must become a part of a general program of protection in the interest of the individual as well as of the stability of business and the whole economic structure. This conception of integration is hampered by traditional thinking and the practical problems that must attend any effort to merge the separate administrations that have been built up. Since our own experience in the field of social insurance is almost entirely confined to accident compensation, the United States is in a strategic position to establish well-integrated social insurance programs.

As a supplementary measure in times of widespread and prolonged depression some form of emergency relief or transitional benefit has been deemed necessary in all foreign countries with unemployment insurance systems. In its report to the President, the Committee on Economic Security recommended that persons who remain unemployed after their benefit rights are exhausted be given work–an opportunity to support themselves and their families at work provided by the Government–rather than a cash benefit.

Source: The Committee on Economic Security (CES), “Social Security In America” http://www.ssa.gov/history/reports/ces/cesbookc1.html