Committee on Economic Security (CES)

Volume I. Unemployment Compensation
Other Staff Reports
General Discussions

Limitations and Value of Unemployment Insurance

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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