The Scandal in Unemployment Insurance

In unprecedented numbers, honeymooners, housewives, vacationers, and strikers are receiving benefits from the unemployment insurance fund. In the following article, an office manager of the Employment Service reveals the antiquity of our unemployment insurance laws.


IN NEW YORK CITY it was a society-page wedding and the pretty bride had landed a prize catch, a prominent young executive. On Monday morning the bride quit blushing long enough to appear at the Buffalo Employment Service office to file a claim for unemployment compensation. Under the New York law she was justified even though she quit her job to accompany her husband to a new locale. She continued her search for work just long enough to collect twenty-six weeks of benefits, and then retired to the suburbs to become a housewife. After all, why should she work? With her husband earning more than $10,000 per year, the tax-free unemployment check was preferable to taxable wages.

Across the country, in Oregon, an employee was caught embezzling funds and was promptly discharged. The next day be reported to the office of the Oregon Employment Service at Eugene and filed a compensation claim. After sitting out an eight weeks’ disqualification period, he drew benefits paid for by his former employer.

In Columbus, Ohio, an executive was retired from a company at age sixty-five and promptly filed for unemployment compensation. An unusual case? No — only if you consider that he receives $7000 per year in dividends from company stock.

Last year a local union in Rhode Island voted to go out on strike. The workers received $5.15 an hour and decided this was too meager a wage. The employer was pressured into a new wage settlement after he discovered that his employees were drawing benefits paid for by a tax on his payroll.

These scenes are becoming more and more common throughout the nation as Employment Service people try desperately to apply antiquated laws to atomic-age problems.

The avalanche of honeymooners, vacationers, retired people, pregnant women, and freeloaders, all drawing benefits, has made it apparent that the present legal structure is hopelessly outdated. The unemployment insurance law passed in the midthirties was designed to combat a completely different set of problems from what exists today. Yet only haphazard changes have been made in the law to plug some of the more obvious loopholes that have developed.

One of the major problems facing the unemployment insurance program is the federal-state system of operations. The Wagner-Peyser Act of 1933, creating the Employment Service, and the Social Security Act of 1935, establishing the unemployment insurance system, form probably the most unusual federal-state program ever to exist. Under these acts the federal government provides the funds and establishes the policy for the Employment Service. The states themselves operate the unemployment insurance program. The result is a hodgepodge of fifty separate unemployment insurance laws, with each state pulling in a different direction. The legal manuals and interpretations are so extensive as to leave Employment Service claims takers in a state of confusion.

Another situation that is difficult to justify is the federal Bureau of Employment Security’s collecting a special payroll tax from the nation’s employers to operate the Employment Service, while at the same time each state is collecting payroll taxes to support the state unemployment insurance fund. Both the federal and state governments are thus maintaining their own books on identical employers to finance the same program. This duplication of recordkeeping is both time-consuming and extremely expensive. If the federal government already has the social security system of employer accounts set up, why must the state also go to the expense of collecting payroll taxes?

Employers too are finding cause to complain. Tax rates have soared as many states have become hard-pressed to retain solvency of their trust fund. Most states are operating on a tax rate nearly double the rate of ten years ago. Despite the fact that they have been operating at the maximum tax level allowed by law, several states have gone broke and have been forced to borrow from a special federal contingency fund.

Employers and Employment Service personnel alike are beginning to ask. “Are all these claimants really entitled to benefits?” “Are we paying benefits to people who are not really attached to the labor market?” “Do we need to take a long, hard look at our unemployment insurance system?”

The working woman has provided probably the largest area of abuse in the unemployment insurance program. When the original law was established, very few women were in the labor force. Today, one out of four women is employed, and the job turnover of women is more than three times that of men. Women comprise only 20 percent of the labor force, yet they draw close to 40 percent of the unemployment insurance benefits. The law is not equipped to cope with this situation, and the result is a financial drain on the program.

Take the pregnant woman for instance. Under the present system, thirty-five states pay benefits to women who have quit their jobs because of pregnancy. Only fifteen states disqualify an expectant mother from receiving compensation.

Only twenty states disqualify a woman for quitting her job for a domestic reason. In all other states, a woman can quit her job because she is needed at home, or she can move to a new locality and draw benefits. The only requirement is her signed statement that she is seeking employment.

Then, of course, there is the married woman who dutifully reports each week to the office to sign for a benefit check. Her husband is employed at a very good salary, and the tax-free compensation is just what the doctor ordered. She may be the mother of several small children and have no intention of ever working again. In all fifty states, all that she must do to receive compensation is to say that she desires employment. Probably every U.S. Employment Service office in the nation each week witnesses a mother, a baby in her arms, sign a benefit check.

The food-processing industry has created an additional problem that the present law is unable to cope with. In the West, the Midwest, and in Maine, the food-processing industry conveniently employs thousands of women from September through May. Each June they converge on the Employment Service to sign up for three months of benefits. The majority of these women do not want work during the summer and look forward to a paid vacation with their children. All they need to do to draw their check is to report to the office each week and state that they desire employment.

Another chiseler is the real vacationer, the claimant who spends two weeks visiting relatives and draws benefits at the same time. For an unemployed worker familiar with the law, this is not hard to arrange. He reports to the office, states that he desires to leave the area to seek employment, and obtains two courtesy report forms. As long as he reports to the office in the town he is visiting, he has fulfilled his only legal requirement for benefits. During the summer of 1962, most Western Employment Service offices reported that Seattle was the place to look for a job! Was it coincidence that the World’s Fair was also being staged there?

One of the most difficult problems to solve is the question of the retired worker. Only ten states have any statutory provisions to reduce or stop the payment of benefits to retired individuals. The other forty states allow a person to draw both retirement pay and unemployment compensation. If an individual cares to study the law before retiring, he can juggle his base-period wages so that he can draw two complete series of benefits.

Another administrative headache is the factor of incentive for additional income. For instance, take the single man engaged in logging or construction work. He probably earns $6000 to $10,000 during a sixto eight-month season. After being laid off, this worker is better off financially if he takes the $40 to $55 in compensation than if he works. His tax-free benefit check is probably greater than his paycheck would be after taxes.

This philosophy is particularly prominent where a state paying high wages and benefits is located near a low-income rural state. The unemployed worker returns to his home state where he can live more cheaply and draws a large benefit check from the state he worked in. The local office many times is hard-pressed to offer employment that pays as much as the individual receives in benefits. In this situation, the claimant just leans back and takes a winter vacation, all expenses paid.

The low amount of wages required to draw compensation is another subject receiving national attention. Most states qualify the unemployed by using wages in the one-year period prior to filing a claim. In many states, the amount required is ridiculously low. Twenty-six States ask only $300 in the base-period year. An additional twenty-one states cover people with $600 or less in the base period. This leaves only thirteen states requiring more than $600 to qualify for compensation.

These figures are so low as to include part-time workers, housewives, students, and just plain loafers in the unemployment insurance program. It is obvious that such workers are not fully attached to the labor market, yet we continue to use these Depression figures to qualify individuals for benefits.

In recent years, organized labor has influenced unemployment insurance legislation, and in New York and Rhode Island workers on strike can receive benefits. Here we have an example of an employer being taxed on his payroll to pay compensation to workers on strike against him. Other industrial states are feeling the influence of organized labor on legislation, and unless the public becomes more aware of this situation, many more states will probably cover the striking worker.

The story goes on and on: thirty-five states allow a person to draw compensation for quitting his job; thirty-two states permit an individual to receive benefits even though he has been discharged for misconduct; and thirty-seven states allow the jobless to continue his claim after refusing suitable employment. True, most of these states assess a period of disqualification, but usually after five to eight weeks the individual again receives his benefit check.

Actual fraud to obtain benefits is quite rare, and most Employment Service administrators feel this is not a great problem. The biggest stumbling block is the loose wording in the unemployment insurance laws which allows a claimant much leeway in legal interpretation. Most state laws permit a worker to quit a job with “good cause” and to draw compensation. Not a single state law actually defines what constitutes “good cause.” and thus the door is opened to liberal legal interpretation.

As one state agency administrator recently said, “I think it is time for us to take a look at this program and decide what we are attempting to accomplish. Are we trying to cover only the loss of primary family income or are we just trying to distribute money to whomever is out of a job?” He further observed that “national coordination or direction is not only poor but is totally lacking.”

Most state Employment Service personnel believe the law has failed to keep pace with the present labor market and economic conditions. The result is a straying from the original concept of insuring a family against loss of its primary income.

Just how to bring fifty separate unemployment insurance laws up-to-date is not quite clear, but all concerned agree it must be done. Many agency directors have looked to Washington, but the attitude of the Bureau of Employment Security is one of complacency and reluctance to interfere in state affairs. Over the years, there have been many amendments to the basic Social Security Act of 1935. But most of these amendments have been made to expand coverage, not to curb abuses.

At nearly every session of the state legislatures, various amendments are offered to modify some provision of the unemployment insurance law. Most of these amendments are made upon the recommendation of some special-interest group or some uninformed congressman. The result is an ever-widening gap between state laws, and little is accomplished toward correcting the problems.

Under the Social Security Act of 1935, which created the unemployment insurance system, the federal government was to finance the program with a 3 percent tax on employers’ payrolls. A state had the prerogative, under the law, to set up its own unemployment insurance program if it met the federal standards that were established. In this event, 90 percent of the payroll tax would then go to the state unemployment insurance fund.

These federal standards were very lenient, and all states immediately set up their own programs. Employers then paid a 2.7 percent payroll tax into the state unemployment insurance fund, and only .3 percent went to Washington to operate the U.S. Employment Service.

In this situation Congress does not have control over the state unemployment insurance funds, but it does control the purse strings. If the federal claimant-eligibility requirements are raised, the states must raise theirs to correspond, or the federal funds to the states will cease.

Here, then, is the key to any real national reform of our archaic unemployment insurance system. If Congress were to raise the federal standards so that a claimant would have to prove he is attached to the labor market, all fifty state legislatures would be forced to take a more realistic attitude toward their unemployment insurance laws.

If our federal benefit requirements were raised so that anyone who quit his job for a personal reason or was discharged for misconduct was deemed ineligible. we would be back on the road to where actions rather than words would be the qualifying factors. By adopting laws more specifically worded than our present vague statutes, we not only could eliminate the loopholes that now favor the nonlegitimate claimant, but we could provide better protection for those entitled to benefits.

Many experienced Employment Security people feel that 30 percent of the current unemployment insurance claimants could be legislated off the dole with no moral injustice involved. If this 30 percent saving could then be applied to the task of retraining men and women who are legitimately attached to the labor market and whose skills have become obsolete, some real progress could be made.