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and here is a specific case: An Illinois Central trainman residing in Tennessee was assigned to a run that covered 53 miles in the State of Tennessee, 43 miles in the State of Mississippi and 123 miles in the State of Alabama. He would be taxed under the Alabama law, as the major portion of his employment was within the State of Alabama but being a resident of the State of Tennessee he could not collect benefits in the State of Alabama. Therefore, it is possible for railroad employees, especially in the transportation group, to be taxed without being able to receive the benefits for which they pay taxes and I believe that it is best that railroad employees be taken from under the unemployment insurance provisions of the Social Security Act and that the bill before you be enacted. .

Thank you.

Mr. Martin. Thank you very much, Mr. Farquharson.
The next witness on our list is Dr. Julius H. Parmelee.



Mr. PARMELEE. Mr. Chairman and gentlemen of the committee, my name is Julius H. Parmelee. I am director of the Bureau of Railway Economics of the Association of American Railroads. I have been connected with the Bureau of Railway Economics for more than 25 years and since 1920 have been its director.

I appear here for the Association of American Railroads in opposition to this bill H. R. 10127.

Before entering on my statement, Mr. Chairman, I should like to refer to a question asked yesterday by a member of this committee of Vice President Charles Ď. Young of the Pennsylvania Railroad, who was on the stand at that time. The question related to the relative level of railroad employment at this time, particularly with reference to the corresponding levels during the year 1933.

Colonel Young's answer was that so far as the Pennsylvania Railroad is concerned, fewer employees are on the rolls of the Pennsylvania today than in 1933.

Broadening the answer to that question, I may say to the committee that the number of employees of all railroads combined is lower today than at any time in the past 20 years, during which monthly records of railway employment are available. It is lower today than in any month of the year 1933, even the month of March, the month of the bank holiday, when railway employment was at an extremely low ebb.

Mr. REECE. If I may interject, I assume that during the course of your testimony you will make answer to the question which was propounded by another member of the committee yesterday morning in regard to the statement that the enactment of this legislation would result in a net saving to the railways.

Mr. PARMELEE. That subject will be covered, Mr. Congressman, either by myself or a later witness.

Mr. Mapes. You say that there are fewer men working on the roads now than at any time in the last 20 years. Are fewer hours being worked as well?

Mr. PARMELEE. Yes, that is correct, Mr. Congressman.

Mr. Mapes. In other words, in 1933, there were more men employed than at the present time; but were they working as many hours on the average for each man, to offset the lack of employment, or were they working about the same number of hours then as they are working now?

Mr. PARMELEE. I think the average is about the same, Mr. Congressman. There was some "spread-the-work” in 1933, and there is some today. Generally speaking, the hours of men in the train and engine service have been going down per man, on account of the speeding up of freight- and passenger-train service; in other groups of railway employees, except for the "spread-the-work” principle, which is in effect in some respects today, there certainly has not been any increase in the number of hours per man.

I may say further, as a preface to my statement, Mr. Chairman, that I have given considerable study for several years to the questions of retirement of railroad employees and unemployment compensation for railway employees. As far back as 1935, at the time the Federal Coordinator was working on a plan of unemployment compensation I, among others, representing the railroad industry, was called in by members of the staff of the Federal Coordinator, and at that time consulted with that staff respecting certain features of his work.

During the first half of 1937 I was a member of the committee of railway representatives, which met with the representatives of railway labor organizations and worked out a plan of railroad retirement which was later enacted by the Congress.

Again, during the first 2 or 3 months of the year 1938, I was a member of a committee of railway representatives which met with a similar committee of representatives of railway labor, and for several weeks discussed together the possibilities of a separate system of unemployment compensation. The subject, therefore, is not entirely a new one to me.

As Vice President Charles D. Young of the Pennsylvania Railroad indicated to you yesterday, we do not appear in an attitude of uncompromising opposition to any or all systems of unemployment compensation for railway employees. What the future may hold in this field, no one can know today. But no such fundamental change as this bill contemplates should be made, in our opinion, before the several States have had a certain degree of experience with the present system. Less than half the States have begun to pay benefits. To make a change now, before the State systems become fully operative, would be not only swapping horses while crossing a stream; it would be swapping horses before some of the horses had even entered the stream.

Aside from this consideration, however, and what is far more important, the proposal now before this committee contains many provisions that we oppose as unsound and uneconomic.

In fact, this bill, designed to establish a separate system of unemployment compensation for railway employees, is not what it purports to be. It rejects the principles of unemployment compensation that formed the basis of the Social Security Act. It rejects the principles incorporated in the recommendations of the Social Security Board to the State legislatures as guides to the preparation of the State laws, which were finally written into those laws. Its objectives, and the means by which they would be attained, are not founded on precedent.

The bill discriminates against individuals who in normal times find substantial work in the industry. It would work a discrimination against former railway employees in their search for new sources of employment. It offers the individual employer no incentive to reduce unemployment, by holding out to him the hope of securing a reduction in his tax rate.' Its provisions are experimental, novel, even strange in form. The cost of the benefit provisions of the bill cannot be calculated with exactness, but would be greater than could be met by the proposed tax rate. The label "insurance” is a misnomer.

Unemployment compensation should not be confused with unemployment relief. The guiding principle of unemployment compensation is that, in return for so much work, followed by unemployment, a certain amount of money benefit will be paid. Unemployment relief, on the other hand, is granted to an individual presumably on the basis of his need; it bears no relation to the period of his previous work, if any, nor to his former earnings.

The present bill comes closer to being a system of relief than of unemployment compensation, although in reality it is neither. It is not unemployment compensation, because there is no constant, or even reasonable, relation between the amount of work performed and benefits received for unemployment. It is a distorted form of relief, although it is not based on need, nor even on unemployment, nor is it based on any reasonable amount of work previously performed.

The bill does not set up a system of unemployment insurance, because the fundamental of insurance is that either the cost or the benefits be adjusted to the risk. In life insurance, the greatest risk is the older man. This bill takes the greatest risk-the casual, short-time, irregular, or intermittent railway worker-and proposes to pay him, in relation to his investment of work, up to five or more times as much as the better risk would receive in relation to this work investment. What is proposed is not insurance and has none of the earmarks of insurance. At the same time, it is quite different from unemployment compensation systems now in effect in the United States which, although they do not adjust the benefits to the risk, do adjust them to the work investment.

Mr. MAPES. Doctor, do you put any special emphasis on the phrase "in the United States''?

Mr. PARMELEE. Any emphasis where, Congressman? Mr. MAPES. Is there any particular significance to your use of the phrase "in the United States" in that sentence?

Mr. PARMELEE. I am referring, of course, to the 49 Federal-State systems which are in effect today in continental United States. I am not making any reference to the territorial systems in Hawaii and Alaska.

Mr. MAPES. What I had in mind was, is there some precedent in other countries for this legislation?

Mr. PARMELEE. I know of none, Mr. Congressman, no legislation, no system in any country which offers any precedent whatever for the principal provisions of this bill.

Five fundamental principles underlie the plan of unemployment compensation existing in the United States today. The first of these five principles specifically contemplates the accumulation of reserves in times of normal employment, so that no covered and eligible worker will be denied benefits when business activity decreases and unemployment increases.

The second principle, closely related to the first, offers an incentive for stabilization of employment, accomplished through so-called merit rating provisions. These provisions reduce the taxes of individual employers who are able to keep unemployment within limits, and who thereby build up certain definite reserves.

The third principle is that of paying benefits, up to a given maximum, to the unemployed in exact and unvarying ratio to work performed in a base period.

The fourth principle concerns the payment of benefits for partial unemployment to those workers only who have suffered substantial reduction in earnings.

Each of these four principles is violated in this bill. In fact, the bill rejects these principles and all that they are intended to accomplish.

The fifth, and final, principle is recognition of, and adequate provision for, the fundamental necessity of finding new sources of work for the unemployed. This principle is not carried out in an effective manner by the provisions of the bill.

Mr. REECE. Perhaps the other members of the committee would not be interested, but I would like some one to explain the application of the merit system. I understand in a general way what you mean, but not exactly how it is applied in an individual case.

Mr. PARMELEE. May I answer that question, Mr. Congressman, when I come to discuss more fully the merit-rating provisions, or their lack, in this bill?

Mr. REECE. Yes. I would just like someone to bear it in mind.

Mr. PARMELEE. I will be glad to keep that in mind and refer to that in a more logical order, if I may.

The first two principles enumerated, namely, accumulation of reserves and encouragement to employers to stabilize employment, are outlined in the State laws. Referring to adequate protection against unemployment, the State laws use the following words or their equivalent:

“This—that is, adequate protection against unemployment-can be accomplished by encouraging employers to provide more stable employment and by the systematic accumulation of funds during periods of employment from which benefits may be paid for periods of unemployment, thus maintaining purchasing power and limiting the serious social consequences of poor relief assistance."

Mr. MAPES. What are you quoting from? Mr. PARMELEE. I am quoting from a number of the State laws, Mr. Congressmen, the majority of which carry this phrase or some phrase which is equivalent thereto. The emphasis, you notice, is on the accumulation of reserves and encouragement to the employer to stabilize employment.

Furthermore, all but 2 of the State laws recognize the principle of merit rating and 39 of the laws provide for automatic operation of merit provisions.

No such language, and no such provisions, are to be found in the present bill. The title of the bill informs us that it is intended to establish a certain system of unemployment insurance, but we have to read the bill to find out what is to be accomplished, and how. We are not informed why it is proposed to grant liberal benefits to individuals who happen to find a limited amount of railroad work


within a year, nor why it is proposed to compensate this class of workers, at the expense of the industry, and by discrimination against individuals who, in normal times, find substantial work with the industry. How could reserves be built up to meet the claims of those more regular workers who find themselves unemployed in a depression? Where is the encouragement for stabilization of employment?

I might answer your question at this point, Congressman Reece, by saying that the general pattern of the merit rating provisions is as follows: The individual employer is credited with the amount of taxes which he pays on behalf of his employees, the taxes for unemployment compensation. He is debited—that is, his account is debitedwith the amount of benefits paid to his former employees. Thus there is a running account maintained with each and every employer. If the employer is able to build up a credit reserve in his account and if that credit reserve reaches as high as 7 percent of his annual pay roll, he is then given an automatic reduction in his tax rate.

If that reserve is further built up to some 10 percent, he receives another reduction. And if it goes up to as high as 15 percent, he receives another reduction.

Now, those reductions vary somewhat in the different States, but generally speaking his tax reduction is from 2.7 percent to 1.8 percent if he reaches 774 percent reserve; then there is another reduction to 0.9 percent if he reaches a 10-percent reserve. In some States his tax disappears entirely if he reaches a higher percent reserve. In some States there is a minimum tax below which he may not go.

Mr. REECE. Now, in systems where the employees participate in the payment of taxes, does the merit system have any application to the tax payments of the employees?

Mr. PARMELEE. It does. In several States the employee shares in the reduction along with the employer. There are six States, as you know, which have railway employee taxes at the present time.

The third principle, in accordance with the recommendation of the Social Security Board, provides benefits in fixed relation to work previously performed. All of the 48 States and District of Columbia, except Ohio, have written into their laws provisions which definitely limit benefits, up to the maximum permitted, in exact ratio to earnings or employment in the base period. No such limitation is included in this bill. Because the limitation is omitted, benefits payable in the lower earnings brackets may amount to as much as five and one-half times as much as the individual would receive under the most liberal State law. Even in Ohio, the only exception to the above general rule, the work requirement, before any benefits may be payable, is several times as stringent as that under this bill.

The fourth principle, relating to partial unemployment, is made effective by the States through benefit provisions that automatically limit the payment of benefits to those workers who have suffered loss of earnings. And I emphasize the word "loss” in that connection, Mr. Chairman. Rejecting this principle, the benefit scale in the present bill is so constructed that an employee may actually enjoy an increase, rather than a decrease, in earnings, and yet be entitled to benefits for partial unemployment.

The fifth principle involves an effort to find new sources of work for the unemployed." Under any administrative set-up under this bill, former railway employees would almost certainly be precluded from

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