Committee on Economic Security (CES)
Volume I. Unemployment Compensation
Other Staff Reports
General Discussions
Limitations and Value of Unemployment Insurance
by
Edwin E. Witte
As recently as 1931 numerous articles were appearing in this country in
which the British unemployment insurance system was derisively referred
to as a “dole” and England’s economic difficulties were pointed
to as a warning that this country must never embark on any similar policy.
Now that our direct relief expenditures are more than five times as great
as the amounts which the British government is expending for unemployment
insurance and relief, unemployment insurance is being given a large measure
of credit for England’s alleged rapid progress toward economic recovery.
This remarkable change in opinion is probably attributable far more to
the seriousness of our problems than to an intelligent analysis of unemployment
insurance and its consequences. Long, and still, a staunch believer
in the value of unemployment insurance, I must protest against expecting
too much from this social device. Unemployment insurance has definite
values, but, like all other man-made institutions, also distinct limitations.
To deal with this subject honestly and realistically it is well to begin
with some of the limitations. Unemployment insurance will not solve
the problem of the business cycle. It is not a cure for depressions.
Unemployment insurance may, as in England, help in a measure to sustain
consumer purchasing power during a period of depression but cannot prevent
the depression.
Unemployment insurance will not give jobs to the millions of wage earners
now unemployed nor will it render relief unnecessary. It is conceivable
that the majority of those now on relief might be covered into the unemployment
insurance system and give extended benefits from the outset. But
such extended benefits would have to come from the public treasury and
would still be essentially relief payments, although given a new name.
Unemployment insurance will not directly benefit any group in society
other than the wage earners and the salaried employee. This excludes
the 20% of our gainful workers who are farmers, merchants, professional
men and other self-employed persons. Among the employees, moreover,
there are many who cannot easily be brought under any unemployment insurance
system. This applies to nearly all of the more than three million
wage earners employed in agriculture, forestry and fishing; to the great
majority of the 4,500,000 people who are employed in domestic and personal
service; also, to the 2,300,000 salaried employees classified as executive
and professional. Any employment insurance system likewise must
almost certainly have numerical exclusions, applying only to employers
with a specified number of employees--3, 5 or 10--whatever number
may be chosen. In England despite its relatively much greater industrialization,
seven million persons gainfully employed are outside of the unemployment
insurance act, as compared with twelve million under the law. In
this country probably not much more than half of the fifty million persons
gainfully employed can be bought under any employment insurance system.
Unemployment insurance, moreover, is not well suited to many groups of
industrial workers who can be brought under its provisions. British
experience has proven that the inclusion under the act of part time workers
and short time casual employees creates serious problems. Probably
these groups should not be excluded but in honesty it must be said that
unemployment insurance is not an unmixed blessing for them.
This leaves the largest and one of the most stable groups in our entire
population--the steadily employed industrial workers and the majority
of the clerical employees. In our concern for the twenty or twenty-five
percent of the wage earners who are unemployed, there is danger of forgetting
the seventy-five to eighty percent who are employed. Some
progress is made, not through bringing everybody down to the lowest level,
but rather through raising the submerged to higher standards. At
this time the unemployed need help very badly, but the steady workers
who have held their jobs throughout the depression or who were the first
to be taken back should not be lost sight of.
The employed and the unemployed, of course, are not entirely distinct
groups. There is constant interchange between them. Even in
the worst stage of the depression some of the unemployed were getting
back into employment and in the most prosperous times some of the steadiest
workers lost their jobs and had quite long periods of unemployment before
they found other work. From such rather meager data as is available
it appears that last winter from one-fifth to one-fourth of the unemployed
had been wholly out of work less than six months. In England the
percentage of those who have been unemployed for but short periods appears
at this time to be conceivably smaller; fifty-five of all of the registered
unemployed in January, 1934 had been out of work less than three months;
sixty-seven percent less than six months.
But while there is constant interchange between the employed and the unemployed
it is unfortunately true that there are many among the employed who, at
least for the present, cannot be classified with the great mass of the
steady workers. A third or more of all of the unemployed have not
had a real job for more than two years. The best of these are now
“soft” and have lost much of their skill. A great many are young
men who have never had a job. Many of those never worked steadily
even in boom times. To call even this latter class “unemployables”
is an unjustified stigma; during the World War even the inmates of poor
houses found employment. Those who have long been employed (including
in this group those have no jobs but who have excellent work records and
who have not been unemployed so long that they are no longer top-notch
workers) likewise need greater economic security but along quite different
lines. Unquestionably, the best cure for unemployment, at least
for this group, is employment. This largest group among the wage
earners would be benefited more by a restoration of private employment
to 1929 levels than by anything else. A program of public works
really large enough and gotten under way fast enough to absorb all of
the unemployed would also solve their problems, at least for the time
being. Economic policies which tend to stabilize employment at a
high level and which insure an automatic expansion of public employment
when private employment slackens are of greater importance than unemployment
insurance or any other device which looks toward providing a means of
support when unemployment occurs.
President Roosevelt in his radio address of September 30 very clearly
stated that we must not gauge our economy on the assumption of a large
permanent army of the unemployed. Permanently we cannot have one
group who are employed supporting another large group who are unemployed.
Our economic system cannot endure unless it can be organized so that there
will be only a small residuum of the unemployed, but as far as we can
now foresee there will always be such a residuum. There was unemployment
even during the Great War; no country has ever been without it.
In the years immediately preceding the depression, unemployment among
industrial workers averaged generally above ten percent. So long
as we have seasonal industries there is certain to be some loss of time
in the off-seasons. Changes in technology and in market demand,
as well as numerous other factors, are bound to cause dislocations which
result in a great deal of unemployment for many of the best workers and
while we are not yet out of depression, it need not be said that no cure
has as yet been found for depressions and that it is doubtful whether
we or our successors will be wise enough to so manage the economic system
that we will not have another depression after we are out of this one.
Many workers do not suffer any unemployment in long periods of time.
Of all persons who in December, 1922 had been insured in the British
unemployment insurance system for eight years or more, thirty two percent
had never drawn a shilling in benefits during the preceding eight years.
Yet unemployment is a hazard which may come to any employee however
steady his habits. A quarter of a century ago only a Henry
Ford could vision a time when the railroad industry would be on the decline
due to the competition of the truck, the bus and the private automobile,
and it is still more recently that the coal industry went down through
competition with the oil industry. No one can be certain which will
be the next great industry to sustain a similar decline; and even while
industries flourish plants in particular companies will find it impossible
to continue.
Individual workmen lose out from a still greater variety of causes.
There is in man God-given spirit of adventure which creates restlessness
and leads them to new pastures, which ere long often burn up. A
slight disagreement with a foreman has cost many a good man his job.
Time runs on relentlessly and all workers reach a stage when they are
no longer as strong or as agile as they were earlier in life. Even
in an economic system which is intelligently ordered to provide maximum
employment, there is bound to be unemployment. Although, as the
President suggested, we ground our economic system in abundance rather
than scarcity, even the best workers will have time of unemployment and
it is probable that in the future, as in the past, unemployment will continue
to be the most serious hazard which threatens the economic security of
the individual.
Unemployment insurance, standing alone, cannot fully meet this economic
hazard for any group of workers. True, unemployment insurance is
of limited duration, with benefits in a definite proportion to contributions
of time of employment. It is premised on contract, in need.
Unemployment insurance cannot meet the problem of the old worker who,
having lost his job, cannot get another. In industries which are
declining and in a great depression in substantially all industries many
men of the best work records are certain to exhaust their contractual
benefits. In England at this time there are more insured workers
who are receiving “standard” benefits. Truly unemployment insurance
affords only limited protection against the great hazard of unemployment.
But unemployment insurance is for the regularly employed steady industrial
workers a valuable first line of defense. Unemployment may not be
an insurable risk in the sense that death, old age and accident are definitely
insurable risks. It is impossible definitely to forecast what the
rate of unemployment will be in any industry and still less the hazard
of any employee not merely of becoming unemployed, but also of being unable
to find another job. It is possible, however, to create reserves
which can be drawn on when unemployment occurs.
At any given time our entire population must be largely supported from
current production. It is impossible to store in periods of prosperity
more than a very limited quantity of consumption goods to satisfy wants
during periods of depression. What is possible, through the device
of reserve, is to give legal title to a definite share in the current
production to workers who are currently not producing because they are
unemployed. From the point of view of the insured worker, unemployment
insurance does not differ essentially from any other type of individual
savings: insurance, bank accounts, home ownership and numerous others.
As this depression has abundantly proven, savings have been a life-saver
for many individuals. In total, savings have probably been a more
importance source than all our large relief expenditures. Unemployment
insurance represents an orderly method for creating reserves during periods
of employment for use during periods of unemployment.
At this point some will raise the objection that from a social as distinct
from an individual point of view what is needed is spending rather than
saving. It is urged that depressions, in part, result from too much
saving in periods of prosperity. The creation of unemployment reserves
represents an increase in saving, which so it is argued, means a contraction
of current consumptions. Particularly if the workers are required
to contribute will the net effect be to reduce mass purchasing power which,
according to this view, is the non-plus-ultra of all economic wisdom.
Granting a considerable modicum of truth in the mass purchasing power
theory of the cause of depressions, this argument against unemployment
insurance overlooks the fact that unemployment reserves represent far
less additional saving than directed savings. All successful industries
are always piling up great reserves for all kinds of purposes. The
regularly employed better class of wage earners are saving money, even
in this depression. The recent Brookings Institution study of Our
Capacity To Consume indicates that in the very lowest income group
the net total saving are negative, that is, the total amount spent exceeds
the total current income. This is a strong argument against requiring
any contributions toward unemployment insurance from people in this lowest
income group, although it cannot be overlooked that even in this group
considerable amounts are regularly saved through industrial insurance
and other forms; moreover, this very lowest income group is largely outside
of the unemployment insurance picture.
During the period of the 20’s industry in this country enjoyed a great
boom, while industry in England, if not depressed, (in the sense in which
we have used this term since 1929) was distinctly dull. England
had unemployment insurance. We did not. In our period of prosperity
savings increased a-pace. Billions of workers’ savings went into
the purchase of homes, insurance, bank deposits or mortgages, bonds and
even common stock equities. These savings did not prove altogether
worthless when the depression came, but the realization upon them certainly
fell far short of 100%. Saving in England were far less (mainly
because the total income was less) but the losses in the depression have
also been increasingly less. As it actually worked out, unemployment
insurance in England did not lead to the piling up of any large reserves.
The contributions collected actually went into current consumption.
They operated to keep large numbers of the unemployed somewhat above the
mere subsistence level of relief and thereby tended toward increased mass
purchasing power.
Professor Alvin H. Hansen of the University of Minnesota has recently
estimated that if a nation-wide unemployment insurance system had been
in operation in this country throughout the period from 1923-1929 with
4% contributions, a four week’s waiting period, and a $15 per week maximum
benefit, the actual reserve accumulated by 1929 would have amounted to
a little less than four billion dollars. This is a very substantial
amount, but not so very great compared with the total savings during this
period. How much of this total would have represented additional
savings and how much merely directed savings is debatable. Probably,
however, the net result would have been some decrease in surpluses and,
if the workers had been required to contribute, some reduction in workers’equities
in homes, stocks and bonds, as an offset against the four billion dollars
of unemployment insurance reserve. Very likely this would not have
produced any very great changes in the economic history of the prosperous
years (except that the workers who became unemployed during these years
would have drawn very substantial benefits) but would have made a very
substantial difference when the depression set in. Four billion
dollars of reserves converted into unemployment compensation payments
would unquestionably have had a pronounced effect toward sustaining purchasing
power in the period of decline. Whether we would have been any better
off by this time, no one can tell, but certainly the workers’ savings
would have lasted just that much longer.
The above descriptions of what might have resulted had we had unemployment
insurance in the 20’s assumes the investment of the unemployment reserves
in such a way that they would have actually been available when needed
and that they could have been liquidated without increasing the deflationary
tendencies. This is a vital point in the consideration of any unemployment
insurance system. Unemployment reserves which are so invested that
in a period of depression they are no more liquid than savings put into
real estate or no more secure than savings invested in securities are
of no real help in a depression period, but it is certainly not necessary
to invest unemployment reserves in this manner. This is a point
which President Roosevelt has thoroughly grasped. In his utterances
upon unemployment insurance to date he has been specific only upon two
points: He favors a nation-wide (although not necessarily nationally
administered) unemployment insurance system and he has made it very clear
that he wants all reserves administered by the same agency which is responsible
for the credit policies of the country. The liquidation of unemployment
reserves as large as those which might conceivably have been built up
in the 20’s, will offset if unregulated, all attempts of the national
government to maintain the credit structure when there is a tendency toward
deflation. Handled as President Roosevelt suggests, however, any
such possibility resulting from the creation of unemployment reserves
is guarded against and the federal government ought certainly to be able
to guarantee that the reserve will actually be 100% available when needed.
Unemployment insurance should not be regarded as a cure-all. There
is quite as much danger of over-stating its value as in open-mindedly
refusing to consider it merits. It will directly benefit perhaps
half of the population of the country. It is not a complete or unlimited
protection, even for those who are brought under its provisions.
It is, however, of great value, particularly to the steady, regularly
employed industrial workers during short periods when they are unemployed
because of seasonal lay-offs and numerous minor industrial disturbances.
It can be of benefit to them also in the early stages of depression.
To the general public it is of value because is serves as a protection
to the largest and most substantial group in our entire industrial population.
Rightly handled, it can be made to operate toward stability and sustained
purchasing power.
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