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the first $30 of weekly wages, plus 30 percent of the next $50 of weekly wages, plus $2 for each of the first 3 dependents, with a maximum benefit not exceeding 75 percent of earnings.
The following table shows the weekly benefit amount under these three formulas, all of which are examples of formulas with costs equal to the second set of benefit assumptions.
Illustrative schedule of unemployment benefits using alternative formulas
entailing approximately the same costs
Cost equivalents of the first set of benefit assumptions might also be substituted for the particular formula chosen.
With the first set of benefit conditions containing the $25 maximum weekly benefit, the Council has assumed a uniform duration of 26 weeks of benefits. With the second set of benefit conditions, the Council has assumed a minimum duration of 13 weeks and a maximum duration of 26 weeks, with the further assumption that a week of employment or twice the benefit amount would be required for each additional week of benefits between 13 and 26 weeks. A person with 26 weeks of employment in the base year would be fully insured and entitled to the maximum duration of 26 weeks of benefits.
Since the beginning of the program, there has been a marked trend toward longer duration; the two patterns assumed therefore seem realistic in the light of recent developments. These are the facts:
1. The fraction of base-year earnings used in determining duration has been increased somewhat since the beginning of the program, but a more pronounced increase has occurred in the maximum weeks of benefits to which workers are entitled. In 1937, the maximum duration was 16 weeks or less in all but 6 States; 43 States now provide a maximum of more than 16 weeks, and 7 pay benefits for a maximum of 26 weeks. Now, 87 percent of the covered workers are in States with a maximum of 20 weeks or more, as compared with only 12 percent in 1937.
2. Minimum duration has been increased in nearly all States, though not so markedly as maximum duration. Changes in the minimum duration have resulted from adopting a uniform duration, or from setting a statutory minimum duration, or, most frequently, from changing the relationships between qualifying earnings, weekly benefit amount, and fraction of base-period earnings used to compute duration. While there has never been any pronounced concentration of minimumduration provisions at or near a specific figure, the average minimum duration has increased from about 7 weeks in 1940 to about 10 weeks at present.
3. Because of liberalization of State laws, as well as increases in annual earnings on which duration is based in most States, potential duration has risen from an average of 13 or 14 weeks in 1941 and 1942 to approximately 20 weeks in 1947.
Under the set of conditions with the $25 maximum weekly benefit, the Council assumed that 13 weeks in the base period would make a worker eligible for 26 weeks of unemployment benefits. In the other set of conditions, the Council assumed that claimants who had been employed for 13 weeks in the base period would be eligible for the minimum duration of 13 weeks of benefits and that duration would increase for every week of employment in the base period up to a maximum of 26 weeks. It is not expected that these assumptions would significantly change the proportion of unemployed workers who would earn eligibility for benefits under present laws.
Both sets of benefit assumptions use a 1-week waiting period. In 1948, 43 States had a waiting period of this length or less. The trend toward reduction of the waiting period is indicated by the fact that in 1938 all States required a waiting period of 2 to 4 weeks; while, in 1948, only 8 States had a 2-week waiting period, and none required 3 or 4 weeks.
III. GENERAL PROCEDURES USED IN ESTIMATING Costs
Mr. Woytinsky's monograph, entitled “Principles of Cost Estimates in Unemployment Insurance," provided the ground work for estimating costs. The "favorable” and “medium patterns" described by Mr. Woytinsky are practically the same as the 2-to-5-million and 2-to-10million unemployment cycles assumed in these estimates.
The estimated cost rates (benefits as a percent of taxable wages) shown in the Woytinsky monograph-for a uniform duration of 26 weeks and benefits of 50 percent of previous weekly earnings up to a maximum weekly benefit of $25—ranged from 1.4 to 1.7 percent for the favorable pattern and from 1.8 to 2.0 percent for the medium pattern. These benefit assumptions are the same as one set of benefit assumptions made by the Council. To arrive at the costs of the other set of benefit assumptions described in part II of this appendix, each of the differences between those assumptions and the Woytinsky benefit assumptions was analyzed.
1. A weekly benefit of 50 percent of the weekly earnings up to a maximum benefit of $40' or its equivalent.—Mr. Woytinsky assumed a
• Op. cit.
maximum benefit of $25 and 50 percent of weekly earnings up to this maximum. Raising the maximum from $25 to $40 would increase costs by about 20 percent, according to estimates based on the distribution of high-quarter earnings of workers covered by the old-age and survivors insurance program. This 20-percent increase, applied to Mr. Woytinsky's estimates, yielded cost rates for the higher-cost benefit assumptions of 1.7 to 1.9 percent for the favorable pattern and 2.2 to 2.4 percent for the medium pattern, assuming a uniform duration of 26 weeks.
2. A week of benefits for each week of employment during the base period, not to exceed 26 weeks.-It was estimated that, under these assumptions, potential duration would average 24 weeks during peak employment years
. Costs over a 10-year cycle under a program providing uniform duration of 24 weeks were estimated by interpolating Mr. Woytinsky's estimates for uniform duration of 20 and 26 weeks. The combination of raising the maximum to $40 and a uniform duration of 24 weeks results in estimated costs of 1.7 to 1.9 percent for the favorable pattern of unemployment and 2.1 to 2.3 percent for the medium pattern. The Council assumes variable rather than uniform duration, however; and a slight additional downward adjustment is necessary, for, although potential duration would average 24 weeks during good years, it would probably drop below that figure during a depression.
3. Minimum eligibility requirement of 13 weeks of employment.Mr. Woytinsky assumed that the proportion of claimants ineligible for benefits because of insufficient wage credits would remain about the same as in past experience. With very few exceptions, eligibility provisions under State laws are such that claimants must have worked about 13 weeks on the average to be eligible for benefits. The assumed eligibility requirement, therefore, would not materially increase or decrease present costs.
4. Increase in the tax base to $4,200.-Mr. Woytinsky's estimates are based on the assumption that the first $3,600 of annual earnings would be taxable. If the tax base were raised to $4,200, as the Council recommends, costs under the formula providing a $25 weekly maximum for 26 weeks would probably not exceed 1.5 percent over the cycle with 2 to 5 million unemployed, or 1.8 percent over the cycle with 2 to 10 million unemployed. Comparable figures for the more liberal benefit assumptions would be 1.7 percent and 2.0 percent.
The above figures are cost figures for the country as a whole. To arrive at a minimum contribution rate which would be appropriate for the majority of States, it is necessary first to develop cost figures for the individual States and then, in setting the rate, to take into account a reasonable utilization of existing reserves State by State.
Actual experience during the past 10 years provided the basis for estimating benefit costs for the States, but the experience during the war years of 1942-44 was excluded as not typical of what is anticipated during the next 10 years. Costs were calculated for each State for all other years. The effect of differences in benefit provisions was then eliminated by estimating what the costs would have been under a uniform formula. In this way, a cost relationship among the States based on their past benefit experience was established. The same re
lationship was assumed in estimating costs under the two benefit assumptions and the two economic assumptions in this report. (See tables C and F of this appendix.)
IV. SETTING THE MINIMUM CONTRIBUTION RATE
The problem in setting the minimum contribution rate was to arrive at a rate which would support the assumed level of benefits in most States over the next 10 years, taking into account the utilization of existing reserves. As has been indicated, the Council made estimates for the individual States for two sets of benefit assumptions under two hypothetical economic conditions. Under either set of economic assumptions, a contribution rate of 1.2 percent, required as a minimum by the Federal Government, seems reasonable for either of the assumed benefit levels.
According to our estimates, the minimum rate of 1.2 percent would be applicable to at least 30 States within a relatively narrow range of adjustment in benefits or contributions under all four sets of assumptions. Contributions in five States would undoubtedly have to be higher to support a benefit structure that could be considered adequate, and benefit costs in three others are so low that reserves would increase under even more pessimistic assumptions than 2 to 10 million unemployed. The 1.2 percent rate is reasonably applicable to various States among the remaining 13 depending on which set of assumptions is used and how large a reserve is assumed to be desirable at the end of the 10-year cycle. Below is an analysis of the effect of the 1.2 percent minimum rate under the two assumed levels of benefits, in each case discussed under the two sets of hypothetical economic conditions.
A. THE EQUIVALENT OF 50 PERCENT OF AVERAGE WAGES UP TO A MAXIMUM
BENEFIT OF $40 A WEEK
Under the more liberal benefit assumption and assuming that unemployment will range between 2 and 5 million, a 1.2 percent contribution rate (0.6 percent payable by employers and 0.6 percent by employees) over the next 10-year cycle would, on the basis of past benefit experience, result in there being 26 States with reserves at the end of the cycle of from 5.0 to 9.9 percent of taxable pay rolls (table C, p. 198). "In 13 States, the reserves at the end of the 10-year cycle would be less than 5 percent of taxable wages, and in 12 Štates the reserves would be more than 10 percent.
Of the 13 States whose reserve ratios would be less than 5 percent, 5 (Alabama, Massachusetts, Michigan, New York, and Rhode Island) would have exhausted their reserves completely if they provided benefits as liberal as those assumed and charged no more than the 1.2 percent rate. Table D, p. 199, indicates the tax rates which these 13 States would have to charge on the basis of past benefit experience if they were to end the 10-year cycle with reserves representing either 3 percent or 5 percent of taxable wages. *Pt. II of this appendis describes these benefit assumptions in detail.
TABLE C.-Estimated average annual benefit costs and State unemployment
reserves as a percent of taxable wages' at the end of a 10-year cycle with a uniform contribution rate of 1.2 percent and a $40 maximum benefit formula'
9.1 6.8 6.6
.6 8.1 9.7 6.8 14.6
5.2 10.3 15.9 10.8 3.9 5.3 7.5 4. 7 11.4
Average, 51 States.
5.8 10.3 9.3 9. 2 10.6
8.6 10.8 6.6 8.5 7.1 8.5 9.6 10.8 6.9 7.2 8.1 8.5 12.3 9.4 9.1 9.5 5. 2 5. 1 8.7 10.8
8. 4 12.0
9.0 13,3 8.9 8. 2 10.3 5.6 9. 2 5.9 8.7 7.9 8.4 7.9 5.7 8. 8 6.1 11. 2 9.7 7.0 10.4
7.3 10.3 8.5
1.9 1.5 1.6 1.6 2.3 1.4 1.5 1.3
.2 5.9 -1.5 -1.6
8. 2 11.8
9.9 12.8 6.4 6.0 10.8 -.1 13.5 5.6 9,9 3.8
5.1 - 4.8 10.6 7.9 6.1 6.2
1 "Taxable wages" have been increased to take account of the Council's recommendations for extension of coverage and for an increase in the maximum tax base to $4,200 a year.
· Pt. II of this appendix describes these benefit assumptions in detail.