any other industry and is completely disregarded by the State laws) results in the lower-paid workers being hardest hit by unemployment. All factors taken into consideration, the present bill is probably slightly more favorable from the standpoint of benefits than the State laws. This is possible because of the smaller turn-over in railroad employment as compared with employment in other industries.

The fact that slightly higher benefits may be possible certainly cannot be condemned, especially when such higher benefits are incidental to the main purpose of the separate system which is the assurance that all railroad employees may receive equitable treatment in the matter, which as shown, is definitely not the case at present.

The bill under consideration is far more simple, more understandable to the average worker and is capable of being more easily and effectively administered than any of the present State laws. This has been possible to a larger extent because those of us who have assisted in the drafting of the measure have been able to benefit from the States' experience thus far.

This is true, for example, with respect to the matter of partial unemployment, which Judge Hay mentioned yesterday. Most of the States have encountered almost insurmountable administrative difficulties in attempting to pay partial unemployment benefits. Our plan being set up on a daily basis will meet this situation adequately, we believe, without the cumbersome procedure found in the State laws.

Another improvement over the State laws is the elimination of employee contributions. Only six States at present require the railroad employee to contribute. Originally 11 of the State laws called upon the employee to make a contribution, but five of the State legislatures have repealed the employee levy. This is only fair since the unemployed worker is not responsible for his unfortunate condition and in many ways is forced to contribute more than his employer. I wish to submit a supplemental memorandum, Mr. Chairman, on employee contributions.

Mr. CROSSER. Without objection, the document will be made a part of the record.

(The document above referred to is as follows:)

SUPPLEMENTAL STATEMENT OF HORACE A. BACUS ON RAILROAD UNEMPLOYMENT INSURANCE BILL (H. R. 10127, S. 3772)

Employee contributions.-No employee contribution is included in this bill. Under a few State unemployment compensation statutes, there are employee contributions usually at the rate of 2 to 11⁄2 percent of the employee's wages. Most of the States make no provision for employee contributions and there is no employee tax under title IX of the Social Security Act.

The Committee on Ways and Means of the House of Representatives in reporting out the Social Security Act indicated that the tax under title IX was imposed because employers should bear at least part of the cost of unemployment compensation just as they bear the cost of workmen's compensation and that the States were left free to tax employers and employees as they deem it desirable.1 That most of the States deemed it desirable not to tax only employers is clear. It is also evident that the trend in the United States is away from employee contributions. Originally 11 statutes contained employee contributions and at present only 7 now contain provision for employee contributions.2

1 House of Representatives, Report No. 615, Seventy-fourth Congress, first session, page 8.

Idaho, Indiana, New Hampshire, and Washington dropped the employee contribution. Now only Alabama, California, Kentucky, Louisiana, Massachusetts, New Jersey, and Rhode Island tax employees'

wages

73643-38-6

Six of these States now tax railroad employees. The railroad employees in these States feel that the wage differentials created by these six laws are discriminating, and that they should not bear the additional burden as compared with other railroad workers, of contributing to a system basically unsatisfactory to the industry. As an expression of this it has been reported that some railroad workers have moved their residence out of an employee-contribution State to which they had been allocated by the employer, and exercised their seniority rights to bid on jobs to be performed entirely outside of the State.3

It is generally argued that employee contributions enable the fund to pay benefits for a longer period of unemployment than would be possible without funds from this source, that participation by the employee will invite his alertness to protect it against malingering and fraud, and that a worker can be expected to contribute because he is the beneficiary of the insurances.

While it may be true that an increase in contributions will increase the benefit, this in itself is no reason why the employee should pay for the increase in contributions necessary. As a matter of fact, employees at the present time pay a fair proportion of their earnings for the payment of old-age pension taxes and any additional tax will tend to reduce their earnings while they are employed, in addition to the reduction of wages due to unemployment. Unemployment insurance is primarily designed to take care of short-run unemployment, whereas longtime unemployment, to a great extent, is beyond the control of the industry, but is affected by general industrial conditions. Therefore the employer's liability is fixed by law so that they are held responsible only for a limited amount of unemployment. If longer periods of benefit are desired it probably should be provided through general taxation of the community instead of an employee contribution.

Insurance does not depend upon a contribution by the beneficiary. Under many private sickness-insurance plans established by large industrial companies, the beneficiaries do not pay the premiums. In workmen's compensation, the worker pays no premium in case of accident and he is still entitled to benefit.

The employees are alert against any malingering or fraud, for it is to their interest to do so even if no employee contributions are available. The greater the alertness, the more funds there will be available to the genuinely unemployed. The true incentive for this alertness is not necessarily an employee contribution.

Railroad employees will bear most of the burden of unemployment even though they are not responsible for their unemployment and cannot prevent it. They receive in benefits only a proportionate part of their normal earnings, and these benefits are not paid for the entire duration of unemployment. While the railroad employer may through a rise in tariffs pass on part of his tax to the consumer, the employee cannot do so, but is compelled to pay higher prices which might result from the taxation of employers.

Mr. BACUS. Still another very marked improvement over a great number of the State laws is the departure from the merit rating principle. The merit rating principle, found in some form or another in a number of the State laws, generally means reduced rates after 1941 for employers whose contributions have exceeded benefit payments on the basis of established ratios.

Railroad employees are definitely convinced that the merit rating principle is not only economically unsound, but is administratively expensive and impracticable, and results in relieving certain employers of their full social responsibility. We believe that experience will demonstrate conclusively, in due course, the insufficiency of the merit rating principle.

Under the merit rating plan at the beginning of a period of business depression, when there is a heavy drain on the unemployment insurance fund and a heavier drain to follow immediately, employers, assuming they have stabilized employment as required, will at the time when contributions and benefits are most needed, be paying minimum amounts into the fund, and as the depression wears off and employees return to work the employers will be making larger contributions.

3 Fifty-second Report of Railroad Accounting Offices, Association of American Railroads, 1937, page 90

In other words, when you need the funds most there will be less coming into the account and as the depression wears off and you need them less there will be more coming into it. It just works backward. Mr. WITHROW. We cannot interrupt a witness?

Mr. CROSSER. It was agreed by the committee yesterday to let the witnesses make their general statements and then ask questions. Mr. WITHROW. All right.

Mr. BACUS. When the accounts of individual employers who may not have been able to stabilize employment to the extent required, have been exhausted, the employees of that employer will be totally deprived of benefits. Such a situation would produce untold dissatisfaction and discontent among workers generally, and particularly among railroad workers.

You would have some employees of a particular railroad drawing benefits in one State where the employer's account should not have been exhausted, and other employees of the same carrier, located in another State, where the employer's account should have become exhausted, unable to receive any benefits at all. Evidently such a situation would be highly discriminatory.

None of the States having merit-rating plans can complain about the loss of railroad funds, because the operation of merit-rating systems will, in due course, take the "profit" out of the coverage of railroad employment, and the merit rating of other industries will probably reduce the net income by much more than the savings now made as railroad contributions.

The merit-rating principle, when it becomes fully operative, would further increase the complexity of reporting by the railroads. From year to year individual roads would have their contribution rates. raised in some States, lowered in some, and in others the rate would remain unchanged.

There is also the possibility that the carriers would transfer workers from high-rate to low-rate States.

From the standpoint of the railroads the tax burden would be increased on those divisions least profitable and decreased on the more profitable divisions.

Merit-rating attempts to fix in advance definite rates for insurance, on the basis of factors which are impossible of measurement when the rate is set. The States have merely guessed at these rates and more than likely the present benefits cannot be supported indefinitely by the present contributions.

In many of the States employment is not sufficiently diversified to warrant the establishment of an insurance plan on so narrow a basis. The railroads would save substantially more under the present bill than they could ever expect to save under the merit-rating plans, assuming that they should actually qualify, in due course, for the reduced rates.

Now I may say here that when you talk about the railroads trying to save money through a merit-rating system, you are talking about something that will not happen. When the railroads want to save money, as was indicated last September after the organizations received a slight wage increase, they do it by cutting the force. They would not fool around and try to save $100,000 or $200,000 a year by stabilizing employment. We think that there is a possibility of stabilizing employment in the railroad industry as railroad engineering officials have pointed out, but we do not believe there is sufficient

incentive in the merit-rating system to bring about substantial. stabilization of employment.

The carriers may rejoice in their separate national railroad unemployment insurance system at a later date when they may discover that the application of the merit-rating principle by the States has so impaired the solvency of the State funds, that a general increase in the contribution rate has become necessary under State laws.

We understand that there has been some hope that the whole social security program will break down and that as a result not only the railroads, but other employers will be free from the taxes which they now pay under the unemployment insurance laws. It may be that the railroads feel that if we set up a satisfactory system here that if the State laws do break down they would be caught under a sound system and be compelled to continue to pay taxes. Personally we do not believe that there is any danger of the State laws and State unemployment insurance systems breaking down. We do not believe that Congress will let that take place.

In the railroad industry those roads which because of their natural location, could stabilize their employment, would enjoy an undue advantage over those in less favorable sections, which experience has demonstrated cannot and will not stabilize employment.

Railroad unemployment is a by-product of the operation of the railroad industry and the industry is responsible to society to alleviate the undesirable condition which apparently is inseparable from the operation of the industry. The merit-rating principle places this responsibility upon the individual employer, when it should be placed upon the entire industry. Any effective system of insurance spreads the risk over as large a field as feasibly possible. It is our thought that the States will find it necessary, in due course, to abandon the merit rating plans. We feel that the departure from the merit rating principle in this bill constitutes marked progress in the development of a sounder system of unemployment insurance in this country.

I want to submit at this time, Mr. Chairman, a supplemental memorandum on merit-rating in unemployment insurance; and also in connection with this memorandum a statement by Harry Weiss on Unemployment Prevention Through Unemployment Compensation. Mr. Weiss is with the Social Security Board and is an outstanding authority on the subject of unemployment compensation. I should like to call the attention of the committee just briefly to the conclusion of Mr. Weiss as the result of his investigation.

It is our conclusion that the automatic merit-rating plans incorporated in many of our compensation laws are largely ineffective for the prevention of unemployment and seriously hinder the building up of adequate reserves to meet the hazards of the next depression.

I submit the documents for the record.

Mr. CROSSER. Without objection, they may be incorporated. (The documents referred to are as follows:)

RAILROAD UNEMPLOYMENT INSURANCE BILL (H. R. 10127 AND S. 3772)

MERIT RATING IN UNEMPLOYMENT INSURANCE

The Railway Labor Executives' Association is opposed to the inclusion of any plan of so-called merit rating in the railroad unemployment insurance bill. The following statement in support of our position discusses the problem under the following headings:

I. Meaning of merit rating.

II. Merit rating in workmen's compensation laws.

III. "Merit rating" in foreign unemployment insurance laws.

IV. Digest of merit rating provisions of State unemployment compensation laws.

V. Administrative complexities of merit rating.

VI. General case for merit rating.

VII. General case against merit rating.

VIII. Particular criticism of State merit rating plans.

IX. Particular criticism of merit rating under a plan of unemployment insurance for railroad workers.

I. Meaning of merit rating.—In order to combine the objectives of unemployment prevention and unemployment relief in the same legislation most of our State unemployment compensation laws provide for variations from the basic contribution rate for each employer in accordance with some measure of his employment experience. The purpose is to encourage unemployment prevention by the fear of increased rates, if unsuccessful in prevention, and the hope of lower rates, if successful.

II. Merit rating in workmen's compensation.-Merit rating has been adopted in unemployment compensation on the basis of a questionable analogy from workmen's compensation. In workmen's compensation there is first determined a premium rate for each industry (not for all industries) sufficient to bear the cost of all accidents in that industry. Thereafter merit rating takes two forms. Schedule rating provides lower rates for employers who install devices to reduce the hazard of accidents. Experience rating then adjusts each employer's premium rate, up or down, according to whether his actual accident experience is worse or better than the average for his industry. In this field merit rating is reasonably effective because the accident rate in any plant is largely within the power of the employer to control. By proper housekeeping and the installation of safety practices and devices, he can reduce accidents at a cost less than the cost of the accident compensation which would otherwise be payable. It is obvious that the employer has not the same degree of control over unemployment. III. Merit rating in foreign unemployment insurance. No foreign unemployment insurance law has ever had anything resembling the merit rating of individual employers. However, England, Austria, and Germany very quickly discovered that their much simpler plans of rate variation were impracticable. England repealed in 1920 those provisions of the 1911 law which set up individual employer accounts in anticipation of later differentiation in contributions by trades, and those which provided for refunding part of the employer's contribution for men continually employed by him during each year. In 1921 she suspended the provision of the 1920 law which authorized the setting up of special schemes for stable industries. Within a year Austria abandoned its plan of separate rates for good, average, and bad risks. Germany never put into operation its plan for regional variation in rates.

IV. Merit rating provisions of State unemployment compensation laws.-If the rate variations under the seven (or eight, counting Vermont) laws which provide for "employer reserve accounts" are included under the term merit rating, this device is found in 40 State and Territorial laws. Of the 11 others, 9 provide for special study of merit rating by the administrative agency. In 32 of the 40 with merit rating, the rates are automatically set in accordance with some formula; in the remaining 8 the rates will be set, within given limits, by the administrative agency. All the 40 provide for decreased rates in accordance with the condition of each employer's account but 17 restrict reductions in accordance with the condition of the fund. Only 27 provide for increased rates; 10 permit rates to be reduced to zero. A typical merit-rating provision is found in section 7 c (1)-(3) of the unemployment compensation law of Colorado a copy of which is attached hereto. It provides that no rate less than the standard 2.7 percent shall be permitted unless the assets of the fund exceed the benefits paid in the preceding year, nor less than 1.8 percent unless the assets equal twice such benefits. Subject to this condition, if all the employer's past contributions exceed all the benefits chargeable to his account, his rate will be reduced (1) to 1.8 percent if his account shows a balance equal to 7.5 to 10 percent of his average annual pay roll for the last 3 or last 5 preceding years (whichever is higher) and (2) to 0.9 percent if his account shows a balance of 10 percent or over. If for the 60 preceding months or all past periods (whichever is more advantageous to the employer) the benefits chargeable to him exceed his contributions, his rate will be increased to 3.6 percent. V. Administrative complexities of merit rating.-A provision of the kind outlined above requires:

1. That a separate account be kept of each employer's contributions for both (a) all past periods and (b) for the preceding 60 months.