the two programs will eliminate many of the gaps in protection against the loss of wages from disability that would exist under two separate programs.

The plan to provide temporary-disability insurance by the exclusive use of State-supervised private plans has been advocated by those who recognize the need for protection from wage loss during temporary disability but who believe such protection can best be provided by the purchase of group insurance or by self-insurance by employers. Under this plan, there would be no State-operated program; but, instead, private plans would be required under compulsory State legislation which would make it necessary for employers to provide a minimum level of protection to employees.

Many of the arguments in favor of this plan are similar to those that are advanced for permitting private plans to be substituted for a State-operated system. The proponents of the exclusively privateplan system argue that such a system would provide a high degree of flexibility and avoid freezing benefits at a statutory level; would permit the continuation of existing employer plans or the adoption of new plans if employers and employees desired and were able to pay for better protection; and that the employers would have a more direct interest in the system.

The advocates of this plan usually admit that some difficulties may arise in assuring protection to employees of some employers who may not be readily able to obtain insurance or to meet all the State requirements. They claim, however, that a solution to such difficulties can be found; and they cite the operation of workmen's compensation in jurisdictions that have exclusively private plans for that program as a precedent for the workability of a similar plan for a temporary disability program.

The plan to integrate temporary-disability insurance with medicalcare insurance has been proposed by some of the advocates of the latter program. Under this plan, cash benefits would be paid for loss of wages due to temporary disability; and direct payments would be made to doctors, hospitals, and so forth, furnishing medical care to eligible persons. Although the two programs would be administered by one agency and persons receiving cash benefits would receive medical care, the latter service would also be available to others covered by the medical-care provisions.

Those who favor this plan cite the economy to be obtained by using one wage-record system and one administrative organization to serve both programs. They argue that, because the medical staff needed for one program would also be available for the other, such integration would permit better utilization of the time of the medical profession than would any other system. Furthermore, they claim that integration of the two programs would make rehabilitation services available without delay to those who could benefit from such services.

APPENDIXES-UNEMPLOYMENT INSURANCE

APPENDIX IV-A. COST ESTIMATES

This appendix explains the bases of the cost estimates used by the Council in arriving at its proposed Federal tax rate of 1.5 percent for unemployment insurance to be paid in equal shares by employers and employees. In this rate, 1.2 percent would be offset by contributions to States for benefit purposes, leaving the 0.3 percent Federal tax to be expended for administration and the other purposes outlined in recommendations 10 and 13. This appendix deals only with benefit

costs.

The 1.2 percent rate is merely a minimum State-contribution rate; any State may set a higher rate, as several States will need to do in order to support an adequate system of benefits. Under the Council's proposals, the States will retain responsibility for setting rates high enough to finance benefits under their programs. This minimum tax is proposed by the Council as a means of eliminating, so far as possible, interstate competition for lower contribution rates and thereby reducing present barriers to the provision of adequate benefits.

The 1.2 percent minimum rate is proposed by the Council for the next 10-year period only. It may be too low or too high as a minimum rate for periods which follow. It will certainly be too low for some States. It has been possible to recommend a rate as low as 1.2 percent because of the assumption that a considerable portion of present reserves will be utilized to pay benefits during the next 10 years. Actual benefit costs for the Nation as a whole over the next 10 years will probably be in excess of 1.2 percent of covered pay rolls. The amount of this excess will depend, of course, partly upon the employment pattern and partly on the rate of benefits. The Council has made four estimates based on two economic assumptions and two levels of benefits. The average cost for the next 10 years as shown by these estimates ranges from 1.5 to 2.0 percent of pay rolls.

Cost estimates for unemployment insurance depend on the benefit provisions, and on the volume, duration, and concentration of unemployment. The Council believed it wise to base estimates on two sets of hypothetical economic conditions which might prevail during the next 10 years-(1) a favorable cycle with unemployment ranging from 2 to 5 million in the next decade and (2) a more pessimistic outlook with unemployment ranging from 2 to 10 million. Estimates have been made for two different levels of benefits. One group of benefit assumptions is roughly equivalent to the benefit provisions now in effect in the States with the most liberal provisions, and the other assumption postulates somewhat higher expenditures. Since the estimates form the basis for setting a minimum rate which might prevail over the next 10 years, it seemed desirable to assume some liberalization of benefits such as might be expected during that period.

The Council recommends the minimum rate of 1.2 percent for benefit purposes because this rate seems to be applicable to the majority of the States under both benefit assumptions and both the favorable and unfavorable economic assumptions. We might have suggested a higher rate that would have covered the costs of even the highest-cost State, but this approach was rejected because it would require many States to collect more than they needed for an adequate level of benefits. Similarly, the Council might have proposed a much lower rate that would have covered the costs only in the lowest-cost States; but this approach was rejected because it would not accomplish the Council's purpose of reducing interstate competition for lower contribution rates. With such a minimum rate, most States would still be in the position of having to decide whether they would provide more liberal benefits or reduce the contribution rate to the minimum. The Council believes that the rate of 1.2 percent will avoid interstate competition in contribution rates among most States, but again reiterates the fact that, under its cost assumptions, a few States will have to charge more than the minimum rate, and that all States, under the State-Federal system, must be responsible for providing adequate contribution rates and benefits in relation to their own experience.

These estimates do not undertake to indicate what unemployment insurance will cost in the individual States over the next 10 years or what rates particular States should charge. Much more detailed study on an individual State basis would be needed before conclusions of this type could be reached. The estimates for the individual States are rough calculations based on their past benefit experience (the war years, 1942-44, were not considered in these estimates), and future benefit experience in many States will probably differ from past experience. The estimates do, however, give a basis for establishing a national minimum rate; for this purpose it is not necessary that the costs in each State be accurately predicted as long as the general picture is reasonably correct.

I. ECONOMIC ASSUMPTIONS

Benefit costs for a specific unemployment insurance program depend primarily upon the economic conditions prevailing during the period under consideration.

In order to determine costs over a complete business cycle, the duration of the cycle must be established. If estimates are projected for only 3 or 4 years ahead they cannot adequately take account of a relatively severe decline, with unemployment reaching 5, 8, or 10 million, and subsequent return to predepression levels of business activity. On the other hand, it would be impractical to plan the financial structure of an unemployment insurance program too many years ahead. In view of these considerations, therefore, variations in economic activity over a 10-year period were considered. Ten years was deemed long enough to encompass anticipated variations in economic activity but not too long for practical purposes of planning.

To estimate costs over a business cycle, three basic assumptions need be established: (a) a high level of employment at the beginning and end of the cycle; (b) employment declining in the early phase of the cycle and increasing in its later phase; and (c) the range in the volume

of unemployment. The precise shape of the pattern does not significantly affect the size of the estimates. The slope may be irregular and the trough shifted to the left or right without affecting costs. It is important only that there be peak levels of employment at the beginning and end of the cycle and a specified range of variation in unemployment over the period. Detailed differences during the course of a business cycle tend to average out over the cycle.

A. FAVORABLE PATTERN OF EMPLOYMENT

One set of cost estimates was based on the assumption that unemployment during the next 10 years would vary from 2 to 5 million as follows:

B. UNFAVORABLE PATTERN OF EMPLOYMENT

It is possible that estimated unemployment of 5 million at the trough of the business cycle might prove to be over-optimistic. Another set of estimates was therefore prepared based on the assumption that unemployment would range from 2 to 10 million during the course of the business cycle. In the 2 to 10 million cycle, unemployment was assumed to vary in the following manner:

Unemployment insurance, as it operates in all States, compensates the highest proportion of unemployed workers during peak levels of employment and the initial stages of an economic set-back. As the depression deepens, a growing proportion of unemployed workers exhaust their benefit rights and find it difficult or impossible to get new jobs. During the later stages of a depression, although the absolute number of unemployed may be large, the percentage of the unemployed receiving benefits is much smaller than in the early stages. A fairly rigid demarcation develops among the unemployed between

workers in the turn-over group who stand a good or reasonable chance of finding a job, and those in the hard-core group who have relatively little chance of reemployment during the depression.

The cost estimates under both economic patterns were based on the assumption that turn-over among covered workers during periods of peak employment would average 2 to 3 percent of covered employment per month. This turn-over pattern is indicated by data on initial claims and covered employment reported by the State employment security agencies.

The turn-over group consists in large part of workers out of a job because of frictional factors in the economy that are prevalent in both good times and bad. Even if the workers in the turn-over group had as good chances of finding employment during the depression as during peak business activity, however, the emergence of the hardcore in a depression with almost no chances of finding a job tends to reduce the hiring prospects of unemployed workers taken as a whole. As a result, turn-over tends to decline during a depression. This phenomenon was taken into account in the preparation of the cost estimates.

An even more unfavorable pattern than either of those assumed, with unemployment rising to as much as 13,000,000, would raise costs on the average by perhaps 5 to 10 percent. These higher costs would result mainly from the increased number of initial layoffs averaged over the 10-year period, but also to a lesser extent from the longer duration of compensated unemployment. It is significant, however, that even extreme assumptions for the volume of unemployment do not increase costs substantially. Since unemployment benefits are paid for a limited duration and since eligibility depends upon recent earnings, the effect of large-scale unemployment on the costs of the system is limited.

Some consideration was given to the possibility that employers might rotate jobs by hiring workers as they exhaust benefit rights and laying off others as they gain eligibility for benefits. If this type of share-the-work were widespread, it would increase costs considerably. Because of seniority rules and employment practices, however, the extent of this type of job rotation is likely to be slight. On the other hand, the more normal share-the-work practice of reducing the number of hours worked per week would tend to reduce benefit costs. The cost estimates were based on the assumption that these contrary tendencies would about cancel out and that share-the-work practices would not affect benefit costs.

D. LABOR FORCE

Under both economic patterns, the labor force was assumed to increase at an average of 600,000 a year over the 10 years. At present, the labor force is growing at a rate of more than a million a year. Such growth, however, is unusual during peacetime and is probably attributable to the prevailing boom conditions. As conditions become more stable, the growth in size of labor force will probably tend toward the long-run average of 1 percent per year. About 1.2 million people will probably reach working age each year, while slightly more than half a million will leave the labor market because of age, infirmity, marriage, or death. During the past 12 months, the labor force has been averaging about 62 million.