We wish to call to your attention that this is the second study and report made by outside interests which has made favorable recommendations for the employee. The first was made in November and December 1952. This was covered in my testimony before this committee last year. The employees have not received any noticeable improvement in their conditions as a result of the first study, but are hopeful that the investigations to be made by the Merchant Marine and Fisheries Committee will make the corrections necessary to incorporate the recommendations of both studies.

I shall be glad to answer any questions the committee may have regarding the Booz, Allen & Hamilton study or Canal Zone conditions affecting the employees.

Mr. HAND. Thank you. Have you had an opportunity, Mr. Munro, to make a complete examination of that report?

Mr. MUNRO. Yes sir. The company turned the report loose on the Canal Zone in the newspapers. It carried the main text but not all the charts. I had the newspaper clippings and read them and made a transcript from them. I went to the Panama Canal Company office where I checked my transcript with their original copy and corrected the many errors found. But I still do not have all the charts which render the basic principles on which they made their recommendations.

Mr. HAND. It seems to me that in your position as representing labor there you ought to have available to you one of those complete reports.

Mr. MUNRO. It was available at the Panama Canal Company office if I wanted to use it there, but I had none otherwise.

Mr. HAND. Well, I may say to you that the subcommittee has had a copy of the report complete with charts and has had the opportunity to make a considerable examination of it.

Mr. RILEY. What method, Mr. Munro, is employed by the Panama Canal Company in the Panama Zone administration to obtain new employees when they are necessary?

Mr. MUNRO. Just recently, because of the large increase in turnover they sent a recruitment team to the United States. The Locks Division was particularly interested in this last recruitment program so a member of the Personnel Division and an electrical supervisor from Gatun locks was sent up to the United States where they worked with the United States Employment Service. This team went the rounds of the cities where they thought they could pick up men they needed to recruit.

Mr. RILEY. Did they have any difficulty getting employees?

Mr. MUNRO. I understood they had considerable difficulty in getting the type of employees they hoped to recruit and I believe that the statements have been made by the Personnel Division that if the labor market in the United States continues to be tight and that the conditions on the Canal Zone remain adverse to the employee, they may have to reexamine their standards with the idea of lowering them because they are having difficulty recruiting the first-class mechanics they desire.

Mr. RILEY. I believe the report showed the turnover so I will not ask that question. How is the morale down there?

Mr. MUNRO. It was practically nonexistent until the Booz, Allen and Hamilton Report was made public there. With it being made. public, I believe, they felt that at least they were going to get some consideration on the conditions on the Canal Zone.

You mentioned the turnover figures. I have a statement on that which I would like to place in the record.

(The matter referred to follows:)

In answer to your question on resignations, I have prepared the following table compiled from the Governor's annual reports. This includes resignations only. It does not include retirements or involuntary terminations. The fiscal years 1931-40 are considered normal years.

1 Starting in fiscal year 1951 the effects of Public Law 841, 81st Cong. were felt.

The number of resignations under the present setup range from about 21⁄2 to 71⁄2 times those years considered normal years, depending on the years used for comparison.

Mr. HAND. Thank you very much, Mr. Munro.

Mr. MUNRO. Thank you, Mr. Chairman.

TUESDAY, FEBRUARY 16, 1954.

PANAMA CANAL

WITNESSES

LAVERN R. DILWEG, OF THE UNITED STATES CITIZENS ASSOCIATION

EMMET O'NEAL

Mr. DILWEG. I will run through this rapidly. My name is Lavern R. Dilweg, former Member of Congress, and practicing attorney in Washington, D. C. My associate is Emmet O'Neal, former Member of Congress, and attorney, who served on this committee and at present is located in Washington, D. C. The United States Citizens Association membership is composed of United States civilian citizens residing in the Canal Zone and we are acting as their counsel and Washington representatives.

Many, if not all, of the members of the USCA chose to establish a home in the Canal Zone upon representation from the United States Government that certain compensation would be given them including low rentals, free medical care, and hospitalization, a 25 percent differential in pay and other so-called fringe benefits. These provided the margin necessary for their needs and a way to prepare for old age after years of service in the tropics.

The Federal Government carried out its inducements approximately 40 years and thereby attracted and retained skilled United States workers for operation of the Panama Canal. Originally housing was free, then for many years only a nominal fee was charged for

rent. Commodities and services sold by the canal to the employees were sold at extremely low cost. Liberal leave was provided and for years it was recommended that employees and their families return to their natural climate at least once in every 2 years.

The basic cost of living in this area was lower than the cost of living in the United States which permitetd an employee to enjoy a decent standard of living, periodic returns to his home, a possible college education for his children, and in many cases, perhaps a home in the United States.

During the 40 years of operation of the Panama Canal under the conditions whereby an employee was sufficiently compensated for the disadvantages of working and living in the zone, the canal paid into the United States Treasury many millions of dollars profit and the employees were efficient and loyal, the morale was high.

Many changes were thrust upon the canal in 1951. These changes have resulted in the reduction, removal or threat of reduction or removal of almost every emolument or advantage of employment in the Canal Zone.

Public Law 814, 81st Congress, made income tax applicable on the Canal Zone for the first time. This reduced the employees' income by approximately 20 percent with no corresponding increase in salary.

Application of this tax was discriminatory in that only citizen employees of the Federal Government in the Canal Zone are subject to the tax, while employees of non-Federal activities such as churches, banks, concessionaires, shipping, and oil companies are not taxed, nor are the noncitizen employees of the Federal Government in the zone. Naturally this seemed unfair and served to lower the morale of canal citizen employees.

Public Law 841, 81st Congress, placed in effect a new accounting system for the Panama Canal Company. Section 412B of that legislation reads as follows:

Tolls * * * shall be prescribed at a rate or rates calculated to cover as nearly as practicable the cost of maintaining and operating the Panama Canal together with the facilities and appurtenances related thereto including interest and depreciation on and an appropriate share of the net cost of operation of the agency known as the Canal Zone Government.

By administrative decision the policy was adopted that each separate activity of the Panama Canal Company would recover all costs of its operations despite the inclusion of the words "facilities and appurtenances related thereto" in the basic legislation. The application of this total cost recovery program has resulted in a tremendously increased cost of living for the canal employees.

Rents in some instances have increased more than 100 percent within 12 months. The complete cost of construction, maintenance, interest, and all overhead must be recovered through rentals charges. Rents of houses built in the early 1900's have increased to the point where they are out of proportion to the value received by the tenants and the newly constructed housing rents for approximately $100 per month which few employees can pay.

Except for marine activities almost all commodities and services sold by the canal are sold to the employees who number approximately 3,800 United States. In an attempt to meet the total cost recovery program the zone prices to its employees have spiraled. It is true

that this cost of living has increased in the United States but workers in the United States are not burdened with completely repaying the Government the cost of building and maintaining the facilities and appurtenances in the Panama Canal.

The prices paid for food, clothing, other necessary utilities, and so forth, must be sufficiently high to cover the cost of construction of the buildings, housing the activities, maintenance and interest, depreciation, operating overhead, plus actual cost of the articles or services purchased.

One can easily understand why the morale of the citizen employee of the canal was extremely low at this point, but then the roof fell in when Congress proposed to cut the differential over base pay from 25 percent to 10 percent. With no representation in the National Congress, it was necessary for the employees to band together and send representatives to Washington to plead their case. Thus the USCA was born as a child of necessity and after explanation by its representatives and others Congress did not enact disastrous reduction in the last session, which, in effect, would have reduced the present 25 percent differential for United States citizens to 10 percent and cause the loss of other fringe benefits.

On June 23, 1953, the Senate Committee on Appropriations issued a directive which reads in part as follows:

The committee notes that during the construction days it was necessary to pay premium wages to induce the workers to accept employment in the Canal Zone. Since 1912 the following provisions of law have governed the rates of compensation to be paid employees:

"Receive such compensation as shall be fixed by the President or by his authority until such time as Congress may by law regulate the same, but salaries or compensation fixed by the President hereunder shall in no instance exceed by more than 25 per centum the salary or compensation paid for the same or similar services to persons employed by the Government in continental United States. "It is recognized that many conditions have changed in the intervening 41 years; some of these changes have been in favor of the employees while others have not. It seems appropriate therefore that a comprehensive study be made of the compensation paid workers in the Canal Zone. This study should also include all so-called fringe benefits. The committee directs the Governor of the Canal Zone and the Board of Directors of the Panama Canal Company to have an independent and comprehensive study of this problem made ****

The Booz, Allen & Hamilton management consultant firm, founded in 1914, and one of the leading companies in its field, was engaged by the Board of Directors to conduct an independent and comprehensive study on compensation of Panama Canal employees as directed by the Senate Committee on Appropriations. By agreement prior to contracting it was assumed for purposes of the study that the Company's policy of keeping base pay for zone jobs in line with pay for the same or similar jobs in the States would be effectively implemented and would result in a sound structure of base wages and salaries.

The study was begun in September and was conducted over a period of 3 months. The report and recommendations were submitted to the Board of Directors in December and were considered at a special meeting of that Board held on December 14 in Washington. The consulting firm submitted an 80-page typewritten report with illustrative charts and an appendix containing the results of a questionnaire, and also a survey of employees, former employees, retired employees, and persons who declined employment during the fiscal year 1953. The appendix gives a report on a price index study by the

consultants based on the United States expenditure pattern and the cost-of-living comparisons.

I have carefully studied the full text of this report and believe it is a truly representative picture of the Canal Zone conditions. I am fully aware that time will not permit a comprehensive study of this report by all members of this committee and I believe that the following résumé will be of some help in that reference can be made to the full text if any member so desires. The report embodies five major recommendations specifically set forth as follows:

1. Retention of the 25-percent differential free from income tax. 2. A 50-percent reduction of house rents.

3. Free transportation to their homes in the United States for canal employees and their families every 2 years.

4. Retention of other fringe benefits such as leave, retirement, community services, and free hospital and medical care.

The consultants' main report was divided into six principal subjects, as follows:

The basis for extra compensation of Canal Zone employees;

An analysis of conditions of work in Canal Zone requires extra compensation;

Appraisal of extra compensation paid Canal Zone employees;
Competitive compensation;

The recommended program; and

The cost benefits of the recommended program.

In their chapter analyzing the conditions of work in the Canal Zone which require extra compensation of the consultants set forth their findings under three major headings of "Surroundings," "Hazards to Health and Well-Being," and "Connected Costs."

Special emphasis was given to the isolation and confinement incident to employment in the Canal Zone of United States citizens and the detrimental effect of the tropical climate.

Extensive space was devoted to the following: Schooling, recreational, and medical facilities available to employees and their families as compared with conditions in the United States.

Special emphasis was placed on the disadvantages to employees because of the isolated geographical position of the zone. Some of these disadvantages, the report stated, are lack of job opportunities; confinement to a limited area under "markedly regimented conditions"; and community resources to various degrees lacking in provisions for medical care, education of children, housekeeping conveniences, recreational facilities, and perishable foods.

Under the heading of "Hazards to Health and Well-Being," the report listed the higher incidence of disease, of the physical and mental ill effects of zone, Canal Zone, life as being "intangible" factors of importance.

In the appraisal of the extra compensation paid employees, the consulting firm briefly outlined the history of extra compensation and traced the diminishing returns for employees by imposition of income taxes, increases in rents, commissary prices, and certain other fringe benefits.

The net effect of measurable compensation changes, in cash and kind, the report stated, has been decidedly disadvantageous to the zone worker as compared with workers in the States.