Granting 100 percent Federal aid to finance administration by the States of their unemployment-compensation laws naturally involves some difficulties and problems for the Social Security Board and also for the State administrators.

Federal aid for permanent State activities has usually been granted only on a matching basis, in order to preserve State interest in economical administration. Since Federal money pays the entire costs of State administration under title III, the usual safeguard is lacking in this case.

From the Board's point of view, it is responsible for allotting enough money, but no more than enough money, to pay the necessary costs of properly administering each State law. On the one hand, it knows that good administration is well worth its cost. On the other hand, it cannot afford to grant any State more than that State really needs for good administration. Yet State conditions and State laws differ widely. No lump-sum estimates of reasonable cost can readily be made or applied to the several States, until further experience becomes available.

Under these conditions it is only natural for the Social Security Board to ask each unemployment-compensation State for a detailed quarterly budget, to scrutinize budget items minutely, and either to veto doubtful items or to scale down total requests accordingly. This does not mean that the Board has been unreasonable in its attitude or in its procedures. On the contrary. But the power is there, and might eventually lead to something approaching Federal administration of State laws.

As time goes on the Board may be able to work out a practical basis for giving differentiated treatment to the several States. Detailed Federal supervision and financial control are certainly less needed in some States than in others. Those States which themselves apply civil-service, budget-control, and central-purchasing methods can properly expect less Federal supervision than States which have no effective safeguards of this type. We recommend that the Board give careful consideration to this problem.

From the viewpoint of the State administrators, they cannot reasonably object to being held accountable for the honest expenditure of money received under title III. But they are and should continue to be directly responsible to their own States for effective administration of the laws enacted by those States; and they know that budget and expenditure decisions are a vital part of the administrative function. Some of the States are therefore wondering how 100 percent Federal aid is going to work out in the long run, and how much real discretion will remain in the hands of the State administrations. In short, the major problem involved in 100 percent Federal aid for the State administration of State laws is the possibility of sweeping Federal control over State legislative and administrative policies,

with Federal aid as the leverage used to secure State compliance. Both State and Federal agencies should face this issue, and should jointly study and discuss this central problem of Federal-State cooperation. In that way the issue can be met on a practical and cooperative basis.

This procedure is in fact being followed at the present time, through the interstate conferences which have been held periodically during recent months. These conferences are attended by State unemployment-compensation administrators, and by staff members of the Social Security Board and of other interested Federal agencies. They afford a valuable opportunity for the exchange of information and for the discussion of common problems. We therefore recommend that the whole question of 100 percent Federal aid, as outlined above, be carefully considered and fully discussed in future meetings of the interstate conference. This present report has aimed merely to call attention to the problems apparently inherent in the present situation.

The Role of the States in Unemployment Compensation

It is well to remember that the States have a primary role in the field of unemployment compensation. Despite the above rather extended discussion of Federal standards for tax credits and for administration aids.

The Federal Social Security Act does not require any State to enact an unemployment-compensation law. Unless and until a State takes the initiative in passing such a law, there will be no unemploymentbenefit fund built up for the future protection of its workers.

Each State has wide freedom of choice as to the type of unemployment-compensation law it will enact. It may determine for itself who shall contribute, and at what rates. It may set up employer reserve accounts in the State fund, or may pool contributions in whole or in part, using a merit-rating system or not, as it sees fit. Waiting periods, benefit rates, the duration of benefits, and most benefit eligibility conditions are left entirely to the judgment and discretion of the several States.

Of course, State freedom carries with it State responsibility. Considering the relative lack of experience with unemployment compensation in this country and the many technical problems involved, the present State laws are of remarkably high quality. This is due in no small measure to the advice and technical guidance supplied to the States (on request) by staff members of the Social Security Board. The "draft bills" prepard by the Board have been a genuine help to State legislatures. On the whole, it can therefore be said that the various State laws so far enacted seem reasonably comparable in their beneficiality to workers, and offer a sound basis for future development based on further experience.

In one vital respect, however, most of the State laws fail to have the courage of their convictions. With but three exceptions, these laws would cease to function or even to exist if the unemploymentcompensation provisions of the Federal Social Security Act became inoperative for any reason. An adverse court decision on the Federal act would give most of the present unemployment-compensation States no opportunity even to consider whether their laws should continue to function.

In view of the existence of 16 laws at the present time and the probability that other laws will shortly be enacted, it would seem that each State law, both present and future, should stand on its own feet. Dependence of State laws on the continued operation of the Social Security Act can no longer be defended, in view of the widespread public support unemployment compensation now enjoys in every part of this country. Certainly those who believe that unemployment compensation is and should remain a primary concern of the States, rather than of the National Government, cannot consistently tolerate the present dependence of State laws upon the Federal act.

We therefore urge that existing State laws should be amended, so that they will continue in operation regardless of what happens to the Federal Social Security Act, and that new State laws should likewise stand on their own feet in this respect.

A necessary corollary of this recommendation is that State laws should expressly provide for State financing of their administration, to take effect if Federal aid under title III of the Social Security Act ceases to be available at any future time. Only one State (Wisconsin) now has in its law such a provision for State financing of administrative costs, which could be used in the event that Federal aid ceases. In that State the administrative agency has power to collect from employers an additional administrative assessment, payable into a separate nonlapsing administration fund. Other States might well consider the desirability of enacting some similar provision, to be used only when and if State administrative costs can no longer be financed with Federal money.

Contributions Under State Laws

Although the Federal excise tax on pay rolls levied under title IX of the Social Security Act is payable solely by employers, any State which desires to do so may collect contributions from workers as well as from employers.

Seven of the existing laws, representing about half the present coverage of employees, collect contributions only from employers. Nine laws require contributions from both employers and employees, but collect a much smaller percentage from workers than from employers.

The major argument for contributions solely from employers is that the unemployment for which benefits will be payable is essentially an industrial rather than a personal hazard. It is therefore reasonable to assess the costs against employers, as has already been done for many years under American accident-compensation laws.

The major argument for employee contributions is that they will increase the available funds and will thereby make larger benefit payments possible. It must be recognized, however, that employee contributions mean extra record keeping and reporting by employers, and increased administrative costs. Complete current central office reporting will doubtless be found necessary in those States which collect employee contributions, as against the periodic separation or severance reports which might otherwise be considered in some States. If employees contribute, their payments should of course be pooled in all cases, rather than credited to separate employer accounts.

It is worth noting at this point that the District of Columbia is the only jurisdiction in which a Government contribution has yet been made to an unemployment-compensation fund. The question of Government contributions of course involves the whole relation of unemployment-compensation laws to programs for the relief of longcontinued unemployment.

One further comment may be appropriate at this time. Despite the various estimates which have been made, and despite the limited duration of benefits provided in most State laws, there is of course no assurance that a standard contribution of 2.7 percent will prove adequate to pay the promised benefits, even during minor depressions. It may be that the general level of contribution rates under existing laws is too low.

Merit Rating

Most of the existing State laws include some provision for merit rating, namely, for eventual variation in employer contribution rates, based on unemployment-benefit experience. The primary purpose of such merit-rating provisions is to encourage employers to provide the steadiest possible employment. A secondary purpose is to assess the cost of benefits, for such unemployment as occurs, on those employers and industries and products which are most directly responsible for such costs.

The existing State laws vary rather widely in their treatment of the merit-rating problems. Several merely provide for further study of the problem, which means that they will not include merit-rating systems unless and until there is further action by their legislatures. A number of laws authorize the State administrative agency to study the problem, and to set up a merit-rating system by administrative rule. Some laws contain specific provisions for merit rating, so that each employer can tell in advance how his contribution rate will go

up or down in accordance with his contribution and benefit experience. Most State laws require some minimum contribution even from the steadiest employers. Under a few State laws a steady employer's contributions may cease under specified conditions.

In view of the wide acceptance of the merit-rating idea in American State laws, it seems important to point out that merit rating should operate not only to reduce the contribution rate of a steady employer, but also to raise the contribution rate of an irregular employer. Just as the costs of accident compensation vary widely for different industries and occupations, in view of their different hazards, so too in the field of unemployment compensation the less regular employers should contribute at higher rates. To date there are relatively few State laws which provide for increased rates under their merit-rating systems.

The existing provisions of State unemployment-compensation laws, taken together with the additional credit provisions of section 910 of the Social Security Act, assure a genuine trial for the merit-rating idea in this country.

Coverage

Although the Federal tax levied under title IX of the Social Security Act applies only to employers of eight or more persons, any State is free to adopt a wider coverage. As time goes on, State laws should cover smaller employers and their employees, despite the increasing administrative difficulty involved in such wider coverage.

State laws might also cover to advantage some of the occupations now specifically excluded from the operation of the Federal pay-roll

In this general connection, the question might fairly be raised whether State laws should not apply to the employees of State and local government units, as well as to the employees of private employers.

Probably the most difficult problem of coverage under State laws is the problem of the employee who works partly in one State and partly in another. Athough these workers do not represent a large percentage of the total coverage under State laws, neverthelss for them the problem of proper protection is acute. For interstate railroad employees the best solution is undoubtedly a suitable unemploymentcompensation law enacted by Congress for their protection. As to other employees working across State lines, the best answer would seem to be a uniform provision to be adopted by each of the States, under which gaps and overlapping in jurisdiction would both be avoided so far as possible. The interstate conference of unemployment-compensation States has been studying this problem for some months, and hopes to work out a satisfactory solution.

The Calculation of Unemployment Benefit Rates

American laws use the calendar week as the time unit for measuring the existence of unemployment and for determining unemployment