1940: Unemployment Insurance

The Social Security Act.

With 1940 five years elapsed since the passage of the Social Security Act. Economic conditions during the period changed from a state of depression to the first stages of a huge defense-spending economy. Already the program of social legislation was meeting opposition, some of it the natural opposition to centralized or Federal control. The Social Security Act set up certain standards, such as (1) Federal custody of benefit funds, to safeguard their investment and (2) Federal grants to finance state administration and to provide Federal supervision of such administration; moreover (3) the Federal tax provided inducements to the states to pass state unemployment insurance laws. And from the Federal tax, reserves of almost $2,000,000,000 had accumulated.

Reactions to Accumulated Reserves.

These reserves were responsible for two distinct movements in 1940. Employer organizations, eager to secure lower taxes for their membership and fearful lest the large reserves result in an inflationary movement, urged the creation of a merit system. Under the merit system industries having the least employment would pay the smallest tax; and the system, its proponents felt, would create an inducement to employers to stabilize their industry and eliminate unemployment.

On the other hand, trade union leaders and social workers urged a liberalization of insurance by increasing the size of the benefit to the worker and by shortening the waiting period before receipt of the benefit check. A positive movement to increase Federal control of state unemployment insurance funds was, moreover, afoot. This would seem to be the only way to secure the liberalization of state benefit provisions.

Proposed Changes in the Act; Liberalization of State Laws.

During 1940 the McCormack bill (HR7762) and the Murray bill (S3365) introduced in Congress embodied certain changes in the Social Security Act. These included: (1) The establishment of Federal minimum benefit standards which all state laws must meet in order to secure the advantages of the tax offset; (2) Federal reinsurances, so that if state funds should be exhausted benefits could be paid from some kind of Federal pool; and (3) Federal interference with state experience rating by either increased regulation or complete prohibition.

The first proposal arises from the patchwork-quilt nature of state unemployment insurance laws. Many states have accumulated tremendous reserves while the actual benefits to the worker are small. It has been argued that the Social Security Board's experts were too conservative in their estimate of what benefits a 2.7 per cent pay roll tax would finance. Some states have already liberalized their laws. Of the few states having legislative sessions in 1940, several utilized their sessions for improvements in the unemployment insurance law. Rhode Island reduced the waiting period for the unemployed worker, Mississippi and Virginia increased unemployment benefit amounts and strengthened the eligibility provisions. New Jersey raised the maximum weekly benefit rates to $18 a week and lengthened the insurance period to eighteen weeks. It also protected the rights of those workers inducted into military service by making it possible for them to claim insurance on the base period prior to induction.

The chairman of the Social Security Board, Mr. Altmeyer, recommended in his report that waiting periods be reduced to one week; that maximum weekly benefits be raised to at least $20 a week; that the weekly rate be set at 66½ per cent of full-time earnings in states where the funds are sufficient; that every state provide for partial unemployment benefits; and that the duration of benefits be increased to a uniform period of at least sixteen weeks.

Disbursements in New York State.

In New York State, $18,770,000 more was paid out in unemployment insurance in 1940 than in 1939, an increase of 23.5 per cent over the 1939 figure. Why the state was obliged to pay out so much more when a larger percentage of workers were employed was explained in this wise by the director of the division of placement and unemployment insurance, Mr. Milton O. Loysen. The early stages of the defense program were characterized by a higher rate of labor turnover and much short-term unemployment. This tendency was accentuated by the 'jerkiness' in employment resulting from the inability of many defense plants to get materials and equipment on time. Furthermore, about 300,000 additional employees had been added to the insurance system in 1939. And, finally, as a result of legislative revisions in the benefit period, the average duration of payments to unemployed persons increased from 8.6 weeks in 1939 to more than 10 weeks in 1940.

The Merit-Rating Device.

Both the A. F. of L. and the C.I.O. joined in the fight against the merit-rating device. This device provides that the employer pay unemployment insurance tax in proportion to the stability of employment in his plant. Advocates of this provision declare that the firms which stabilize employment and provide steady work should be rewarded by paying lower taxes, while those industries which are highly seasonal should carry a larger share of the tax burden.

In New York State a merit-rating provision initiated at the request of the New York State Employers' Conference was introduced into the 1940 state legislature in the Young-Wadsworth bill. The A. F. of L. objected to the bill declaring it to be a device to reduce the income of the unemployment-compensation fund. It further declared the benefits paid under the New York unemployment insurance law inadequate, the waiting period too long, and the amount of the benefit check too small to afford the worker reasonable protection. It further stated that experience rating does not lessen unemployment.

An impartial study of the Wisconsin merit-rating system, made by Dr. Charles Myers, reveals that fewer than 11 per cent of the surveyed firms had by its use achieved any appreciable stabilization. Offsetting this slight gain in stabilization, Dr. Myers found 'the development of the tendency to avoid benefits by devices (particularly extreme spreading of work) which do not stabilize employment.'

Organized labor, however, failed to secure benefit liberalization in 1940 in many states because it was so busy fighting merit rating. New York makes no provision for partial unemployment and New Jersey still collects contributions from employees. Only six of the 53 American unemployment compensation laws force workers to contribute. These six states (New Jersey, Kentucky, Alabama, Louisiana, California, and Rhode Island) collect approximately $40,000,000 annually from the pay envelopes of workers. It is agreed as a matter of public policy that in unemployment insurance, like accident compensation, the cost should be paid by the industry and passed on to the consumer.

Amendments of 1939.

The 1939 amendments to the Social Security Act excluded from its provisions, in addition to agricultural labor, previously omitted, student part-time workers, golf caddies, newspaper-carriers under 18, nonprofit associations, as well as wage-earners receiving more than $3,000 annually. State unemployment insurance laws in Kentucky, Louisiana, Maine, Nebraska, Pennsylvania, Virginia, Illinois, New York and South Carolina were amended to conform with these revisions.

Miscellaneous.

With 1940 initiating the development of a tremendous defense program, labor was particularly concerned with retaining its legislative gains. The results of the health examinations of military recruits emphasized in a startling fashion the need for improved physical health. In New York State, the Goldberg bill introduced an amendment to the unemployment insurance law providing that a worker who is capable of employment when he registers as totally unemployed, but who subsequently becomes sick, shall not be prevented by such incapacity from continuing to receive temporary unemployment benefits. The bill was passed by the state legislature in 1940, but was vetoed by the governor. Congress, on the other hand, substantially liberalized the provisions of the Railroad Unemployment Insurance Act during the year.

A significant court interpretation was made with reference to unemployment insurance. 'An employee receiving unemployment benefits is not disqualified from receiving compensation for the same period under the workmen's compensation act,' was the decision of the Supreme Court of Michigan. The legislature, it was said, intended to create two independent organizations to administer two kinds of compensation, payable from different funds.

The fact that there were so few new developments in the field of unemployment insurance during the year was undoubtedly due to the marked decrease in unemployment. Large Government defense orders to the steel, aeroplane, and automobile industries were responsible for absorption of thousands of unemployed workers. The New York State report, however, reveals the fact that increased business activity does not necessarily mean the elimination of unemployment. See also LABOR LEGISLATION.