Nation-wide provision for administering the program, by authorizing grants to States to meet the total cost necessary for proper and efficient administration of their laws. Although technically made from the general Federal Treasury, it is clear from the hearings and committee reports that these grants were thought of as being financed by the 0.3 percent of covered pay rolls which constitutes the income to the Federal Government from the Federal Unemployment Tax Act. These administrative grants were to enable, and also require, the States to use methods of administration reasonably calculated to insure the full payment of benefits when due, to provide for fair hearings to those whose claims are denied, to make reports, and to cooperate effectively with public works agencies and the Railroad Retirement Board. A State was not entitled to the grants if these conditions were not met or if, in the administration of the State law, benefits were denied in a substantial number of cases to individuals entitled thereto under the State law. Except for these very general Federal standards, each of the 51 systems has established its own eligibility requirements, benefit amounts and duration, waiting periods, disqualification rules, and administrative procedures.

The Council has studied the present State-Federal arrangements. and the majority approves the basic principles of the system. In the opinion of the majority (1) the State is the proper unit to determine the benefit provisions which will meet the varying conditions in different parts of the country; (2) State laws can assure more adequate benefits in highly industrialized areas; and (3) the State-Federal program has shown over the past 10 years that it is capable of making progress. In most States the minimums, maximums, and average weekly payments have risen, durations have increased, waiting periods have decreased, and coverage has broadened.

Five members of the Council, however, favor the establishment of a single national system of unemployment insurance. (See appendix IV-C.) In their opinion unemployment is essentially a national prob lem and is an inappropriate area for State operation. They point out that many workers move from State to State in their search for work and that labor markets cut across State lines. The maintenance of 51 separate systems, each with its own reserve, is in their opinion actuarially unsound. They also feel that the effectiveness of the various State plans has been diminished by the growing restrictions on benefits and that the progressive changes in the benefit provisions of State laws have not kept pace with increasing wages and prices. Four of these members would join with the majority, however, in the recommendations included in this report for the improvement of the State-Federal system should the Congress decide against the establishment of a national program. One member is not signing the recommendations of the Council since he disagrees with some of the most important ones even under a continued State-Federal system. (See appendix IV-C.)

Deficiencies in the Present Program

The dual nature of the State-Federal plan for unemployment insurance has limited the scope of the Council's work. Since the actual administration of unemployment benefits is the responsibility of 45 States, the District of Columbia, and the Territories of Alaska and

Hawaii, it would have been impracticable for the Council to have made detailed investigation of administration in each jurisdiction. The Council, however, has studied the basic principles and operations of he State-Federal program and finds five major deficiencies:

1. Inadequate coverage.-Only about 7 out of 10 employees are now overed by unemployment insurance.

2. Benefit financing which operates as a barrier to liberalizing benefit rovisions. The present arrangements permit States to compete in stablishing low contribution rates for employers and therefore disourages the adoption of more adequate benefit provisions.

3. Irrational relationship between the contribution rates and the clical movements of business.-The present arrangements tend to ake the contribution rate fluctuate inversely with the volume of emloyment, declining when employment is high and when contributions the unemployment compensation fund are easiest to make and ineasing when employment declines and when the burden of contribuons is greatest.

4. Administrative deficiencies.-Improvement is needed in methods financing administrative costs, provisions for determining eligibily and benefit amount in interstate claims, procedures for developing terstate claims, and methods designed to insure prompt payments on 1 valid claims and to prevent payments on invalid claims.

5. Lack of adequate employee and citizen participation in the proam.-Workers now have less influence on guiding the administration the program and developing legislative policy than they should, and me employees, employers, and members of the general public tend to gard unemployment compensation more as a hand-out than as social surance earned by employment, financed by contributions, and payle only to those who satisfy eligibility requirements.

The Council has also made recommendations on other points, but s mainly proposed measures designed to remedy these major defects. e recommendations apply only to the continental United States, awaii, and Alaska. The Council, in its report on old-age and survors insurance, proposed that a special commission should be estabhed to determine the various types of social-security protection propriate to Puerto Rico, the Virgin Islands, Guam, and other ssessions of the United States.1

commendations for Improvement of the Program

A summary of the Council's recommendations follows:

1. Employees of small firms.-The size-of-firm limitation on verage in the Federal Unemployment Tax Act should be removed, d employees of small firms should be protected under unemployment surance just as they are now protected under old-age and survivors

urance.

2. Employees of nonprofit organizations.-The Federal Unemoyment Tax Act should be broadened to include employment by all profit organizations, except that services performed by clergyn and members of religious orders should remain excluded. The lusion of domestic workers in college clubs, fraternities, and sorors by the 1939 amendments to the Federal Unemployment Tax Act

See p. 28.

should be repealed so that these workers will again be protected under all State laws.

3. Federal civilian employees.-Employees of the Federal Government and its instrumentalities should receive unemployment benefits through the State unemployment insurance agencies in accordance with the provisions of the State unemployment insurance laws. The States should be reimbursed for the amounts actually paid in benefits based on Federal employment. If there is employment under both the State system and for the Federal Government during the base period, the wage credits should be combined and the States should be reimbursed in the proportion which the amount of Federal employment or wages in the base period bears to the total employment or wages in the base period. The special provisions for federally employed maritime workers should be extended until this recommendation for covering all Federal employees becomes effective.

4. Members of the armed forces.-Members of the armed forces who do not come under the servicemen's readjustment allowance program should be protected by unemployment insurance.

5. Borderline agricultural workers.-To afford protection to certain workers excluded by the 1939 amendments to the Federal Unemployment Tax Act, defining agricultural labor, coverage of that act should be extended to services rendered in handling, packing, packaging, and other forms of processing agricultural and horticultural products, unless such services are performed for the owner or tenant of the farm on which the products are raised and he does not employ five or more persons in such activities in each of four calendar weeks during the year. Coverage should also be extended to services now defined as agricultural labor by section 1607 (1) (3) of the Unemployment Tax Act.

6. Inclusion of tips in the definition of wages.-The definition of wages contained in section 1607 (b) of the Federal Unemployment Tax Act should be amended to specify that such wages shall include all tips or gratuities customarily received by an employee from a customer of an employer.

7. Contributory principle.-To extend to unemployment insurance the contributory principle now recognized in old-age and survivors insurance, a Federal unemployment tax should be paid by employees! as well as employers. Employee contributions to a State unemploy ment-insurance fund should be allowed to offset the Federal employee tax in the same manner as employer contributions are allowed to offset the Federal tax on employers. The employee tax would be collected by employers and paid by them when they pay their own unemployment tax.

8. Maximum wage base.-To take account of increased wage levels and costs of living, and to provide the same wage base for contributions and benefits as that recommended for old-age and survivors insurance, the upper limit on earnings subject to the Federal unemployment tax should be raised from $3,000 to $4,200.

9. Minimum contribution rate. The Federal unemployment tax should be 0.75 percent of covered wages payable by employers and 0.75 percent payable by employees. The taxpayer should be allowed

to credit against the Federal tax the amount of contributions paid into a State unemployment fund, but this credit should not exceed 80 percent of the Federal tax. Since no additional credit against the Federal tax should be allowed for experience rating, the States would, in effect, be required to establish a minimum rate of 0.6 percent on employers and 0.6 percent on employees.

10. Loan fund. The Federal Government should provide loans to a State for the payment of unemployment-insurance benefits when a State is in danger of exhausting its reserves and covered unemployment in the State is heavy. The loan should be for a 5-year period and should carry interest at the average yield of all interest-bearing obligations of the Federal Government.

11. Standards on experience rating.-If a State has an experience rating plan, the Federal act should require that the plan provide: (1) a minimum employer contribution rate of 0.6 percent; (2) an employee rate no higher than the lowest rate payable by an employer in the State; and (3) a rate for newly covered and newly formed firms for the first 3 years under the program which does not exceed the average rate for all employers in the State.

12. Combining wage credits earned in more than one State and processing interstate claims.-The Social Security Administration should be empowered to establish standard procedures for combining unemployment-insurance wage credits earned in more than one State and for processing interstate claims. These procedures should be worked out in consultation with the administrators of the State programs and should provide for the combination of wage credits not only when eligibility is affected but also when such combination would substantially affect benefit amount or duration. All States should be required to follow the prescribed procedures as a condition of receiving administrative grants. Similar procedures should be worked out, in cooperation with the Railroad Retirement Board, for combining vage credits earned under the State systems and under the railroad

stem.

13. Financing administrative costs.-Income from the Federal Unployment Tax Act should be dedicated to unemployment-insurance Doses. One-half of any surplus over expenses incurred in the ction of the tax and the administration of unemployment insurand the employment service should be appropriated to the Fedoan fund, and one-half of the surplus should be proportionately ed to the States for administration or benefit purposes. A coney item should be added to the regular congressional appropriar the administration of the employment-security programs. ministrative standards in the Social Security Act should be le to the expenditure of the surplus funds as well as to exes of the funds originally appropriated.

rification of Federal interest in the proper payment of The Social Security Act should be amended to clarify the the Federal Government not only in the full payment of en due, but also in the prevention of improper payments. dards for disqualifications.-A Federal standard on disons should be adopted prohibiting the States from (1) re

ducing or canceling benefit rights as the result of disqualification except for fraud or misrepresentation, (2) disqualifying those who are discharged because of inability to do the work, and (3) postponing benefits for more than 6 weeks as the result of a disqualification except for fraud or misrepresentation.

16. Study of supplementary plans.-The Congress should direct the Federal Security Agency to study in detail the comparative merits in times of severe unemployment of (a) unemployment assistance, (b) extended unemployment-insurance benefits, (c) work relief, (d) other income-maintenance devices for the unemployed, including public works. This study should be conducted in consultation with the Social Security Administration's Advisory Council on Employment Security, the Council of Economic Advisers, and the State employment security agencies, and should make specific proposals for Federal measures to provide economic security for workers who do not have private or public employment during a depression and who are not adequately protected by unemployment insurance.

Plan of the Report

The Council's proposed remedies for the five major deficiencies of the present program are summarized in this section, which also includes a discussion of the need for a broad informational program. The section which follows presents the 16 specific recommendations in more detail. The report proper concludes with a discussion of temporarydisability insurance. The appendixes include cost estimates for unemployment insurance, material on the proper payment of benefits. dissents, and statistical information on the operation of the programs. Goal of Universal Coverage

At present about 7 out of 10 jobs in American industry are covered by unemployment-insurance laws. It would obviously be desirable, if practicable, to have all jobs covered. In unemployment insurance. however, universal coverage would entail more difficult administrative problems than would be met in old-age and survivors insurance. The Council, therefore, does not recommend that the Federal Unemploy ment Tax Act be extended now to include the two groups which would present the greatest administrative difficulty-farm workers and domestic workers-and, in view of constitutional limitations, the cov erage of employees of State and local governments will have to be left to the States.2

The Council favors the immediate extension of the Federal Unemployment Tax Act to the areas of employment that present no overwhelming administrative or legal difficulties-namely, to employment by small firms, by nonprofit organizations, by the Federal Govern ment (both civil and military), and to certain borderline agricultural employments. Such extension might increase coverage in an average week by over 7 million or to about 85 percent of the total number of individuals employed by others.

2 Extension of compulsory coverage to workers engaged in the "proprietary" functions of government-as opposed to regular governmental functions-is, in all probability, ez stitutional. In a State-Federal program, however, the Council believes that it would be better for States to provide for covering all governmental employees under one plan rather than, in effect, to force the coverage through Federal law of those governmental workers engaged in "proprietary" activities.