Full text of Economic Review (Federal Reserve Bank of Kansas City) : February 1976

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FEBRL:JARY
Is the Federal Reserve Hitting
Its Money Supply Targefs? . . . . ... page 3
Unemployment Insurance
Part I: Programs and Procedures. . page

Subscriptions to th e MONTHLY REVI EW are available to the public without charge. Additional
cop ies of any issue may be obtained from the
R esearch Department, Federal Reserve Bank of
Kansas City, Kansas City, Missouri 64198. Permission is granted to reproduce any material in
this publication provided the source is credited.

Is the Federal Reserve Hitting
Its Money Supply Targets?
By J. A. Cacy

n the spri ng of last year, the Federal Res rve
began to publicly announce its objectives conerni ng future growth rates of various monetary
aggregates . Since that time , a number of ob erver
have devoted considerable attention to the question of whether the Federal Reserve is attaining it
stated objectives. Some observers , for example,
have viewed any divergence of the actual movements in the aggregates from the targeted objectives
as evidence of improper implementation of monetary policy . 1 Other observers, mainly money market participants, have examined actual developments in the aggregates relative to the stated objectives as a hoped for means of determining future
Federal Reserve intentions.
This article examines the issue of whether the
Federal Reserve is meeting its targeted objectives
wi th respect to the monetary and credit aggregates. The first section of the article briefly reviews
the legislative background underlying the publication of the targets and describes the specific targets that have been announced. The next section
discusses various criteria for assessing whether the
targets have been met. The final section applies
some of these criteria to recent movements in the
aggregates with a view toward a certaining the
extent to which-if any-the Federal Reserve has
I/See Milton Friedman, " How to Hit the Money Target ," Newsweek ,
December 8, 1975 .

Monthly Review • February 1976

been successful in achieving its targeted growth
rates of mon y and cred it.

WHATARETHETARGHS?
On March 24, 1975, the U.S. Congress approved the House Concurrent Resolution 133,
which indicated it was the sense of Congress that
the Board of Governors of the Federal Reserve System and the Federal Open Market Committee:
(I) pursue policie in the first halfof 1975 so as to
encourage lower long-term interest rates and expansion in the monetary and credi t aggregates
appropriate to facilitating prompt eco nomic recovery; and
(2) maintain long- run grow th of the mon e tary
and c redit agg rega te commensurate with th e
eco nomy' long- run po tential to increase production , so as to promote effec ti vely the goals of maximum employment , stab le prices, and mod erate
long-term interest rates.

The resolution also indicated that, pursuant with
these general objectives, the Federal Reserve
should consult with Congress at semiannual hearings before the Committee on Banking , Housing
and Urban Affairs of the Senate and the Committee
on Banking, Currency, and Housing of the House
of Repre entatives. These hearings, the resolution
stated , hould concern:
.. . the Board of Governors' and the Federal Open
Market Committee's objectives and plans with

Is the Federal Reserve Hitting

respect to the ranges of growth or diminution of
monetary and credit aggregates in the upcoming
twelve months.

The resolution concluded by stating:
Nothing in this resolution shall be interpreted to
require that s uch ranges of growth or diminution
be achieved if the Board of Governors and the
Federal Open Market Committee determine that
they cannot or should not be achieved because of
changing conditions . The Board of Governors
shall report to the Congress the reason fo r any
such determination during the next hearings held
pursuant to this resol ution . 2

In response to the consultative procedures contained in this resolution , the Chairman of the Federal Reserve Board reported to Congress on three
eparate occasions in 1975: on May I , July 24, and
on November 4 . In the first report to the Senate
Banking Committee, the Chairman indicated the
Federal Reserve was seeking a moderate rate of
expansion in the monetary and credit aggregates.
Such a course, it was felt , would promote an increase in the narrowly defined money supplydenoted as M 1 and defined to include currency in
circulation and demand deposits at commercial
banks-at a rate ranging between 5 and 7 ½ per
cent from March 1975 to March 1976 . Accompanying this growth rate would be higher rates of increase in the other aggregates-ranging from 8½
to 1O½ percent for M2 , defined as MI plus time
deposits at commercia l banks other than large
CD 's; 10 to 12 per cent for M3, defined as M2
plus time deposits at nonbank thrift institutions; and
6½ to 7½ per cent for the bank credit proxy .3
These targeted ranges in the aggregates were
submitted with two important qualifications. The
first was that, in a dynamic economy such as ours,
the economic and financial outlook could change
quickly and dramatically. The Federal Reserve,
therefore, might need to modify promptly its views
2/'" First Mee tin g o n the Conduct o f Mo ne tary Po licy," Hea rings before
the Co mmitt ee on Bankin g, Ho us in g and Urban Affairs , U. S . Senate .
94th Co ngress, April 29-May 2 , 1975 , p. 3.
3/ First Meetin g . . . , p . 172 . The bank c redit proxy in cludes total mem be r bank depos its subj ec t to reserve require me nt s, plus Eurodo llar borrowings, loans sold to bank-related instituti o ns, a nd certain othe r nonde posi t items .

on the appropriate growth rates in the aggregates
to minimize possible economic and financial difficulties. The second qualification was that, while
the announced growth rates were considered appropriate in the existing environment of high unemployment and unused industrial capaci ty, the
growth rates were high by historical standards and
could not be maintained indefinitely without running a serious risk of releasing new inflationary
pressures.
The second consultative hearing was before the
House Banking Committee on July 22-24, 1975.
At that time , the economic prospects were deemed
not materially different from a few months previously, so the Federal Reserve reaffirmed its
intent to seek the same growth rates in the aggregates announced earlier. A change was made, however, in the method of computing the base from
which the growth rates were projected. Whereas a
sing le-month base was employed previously, i.e.,
March 1975 , the growth rates for the aggregates
were now projected to cover the 12-month span
from the second quarter of 1975 to the second
quarter of 1976. A quarterly base was employed
because a 3-month average was considered less
subject to erratic movements in money balances
than a single-month base.
The third consultative hearing was held on November 4, 1975 , before the Senate Banking Committee . At the time of the hearing , the recovery in
the economy was proceeding but infl ation was sti ll
a disturbing problem . Consequently , the Federal
Reserve indicated its intent to continue to pursue a
course of moderation in monetary policy . To implement that policy, the targeted growth ranges of
the monetary aggregates differed little from those
announced previously. Specifically, the growth
range for Ml was again 5 to 7½ per cent, while
the range for M2 and M3 was widened by reducing the lower end 1 percentage point. Accordingly,
the range was 7½ to IO ½ per cent for M2 and
9 to 12 per cent for M3. Similar to the practice
announced earlier, these growth ranges applied to
the period extending from the third quarter of 1975
to the third quarter of 197 6.
Federal Reserve Bank of Kansas City

Its Money Su pply Targets?

METHODS OF ASSESSING TARGET
ACHIEVEMENT

Various methods can be employed to assess
the extent the Federal Reserve accomplishe its objectives for the monetary aggregates . One method
is to compare the growth rates achieved at the end
of the target period with the targeted growth rate
ranges. For example , the actual growth rate of M I
over the target period from March 1975 to March
1976 would be compared with the 5 to 7½ per cent
range targeted for MI . If M 1' s growth rate fro m
March 1975 to March 1976 were at least 5 per cent ,
but no higher than 7 ½ per cent, the M 1 target
would be achieved . Thi method , whi ch i probably
con i tent with the Federal R erv ' appr ach to
target a hievem nt , is the onl y de fin itive way t
a ses whether the targ t hav in fac t been m t.
However, the method allow an as e sment to be
made only after a target period has ended . As such,
it does not allow for the useful procedure of assessing target achievement at various times during
a target period.
Another method of assess ing target achievement is to compare the growth rates of money during ubperiods of a target period with the targeted
growth rate ran ges. Subperi ods co uld be any
length , such as a week, a month, or a quarter. For
in tance , if in the preceding xample MI ' growth
rate in any month exceeded 7 ½ per cent or was
le than 5 per cent , an as essment wo ul d concl ude
that the MI target was not achiev d in that mo nth .
While thi method allo ws an as essment to be made
during a target period , it has the disadvantage of
placing undue emphasi on the short-term behavior
of the monetary aggregates . Overemph as is of
short-term behavior would be especially serious if
the subperiods were as short as a week or a month.
The method used in this article to assess target
achievement may be referred to as the " ray" approach. This approach focu e on the behav ior of
money during interval from the starting point of
the target period to variou points within the period.
Behavior during these interval s i then compared
with the behavior that was targeted for the entire
Monthly Review • February 1976

period. In other words, at any point in time , the
approach answers the question: How is money
behaving so far relative to its targeted behavior for
the entire target period? Thus, the ray approach is
similar to the previous method in that it allows an
asses ment of target achievement to be made during a target period . It differs from the previous
method , however, by placing le s empha i on
short-term movements of money and allowing an
as essment of target achievement from a longer
run perspective .
Use of the ray approach is illustrated in Chart I.
In Panel A of the chart, it is hypothetically assumed that a target period extend from March of
Year l to Mar h of Year 2 and that the ta rgeted
grow th rate range is 3 to 6 per c nt. The target
path , r ray , ha it starting point , or apex, at March
of Year I- the base period. The I wer boundary of
the ray hows the route that money would follow
if money increased throughout the target period at
a rate of 3 per cent , which is the lower bound of
the target growth rate range. The upper boundary
of the ray traces a growth rate of 6 per cent, which
is the upper bound of the target range. If the actual
level of the money supply is within the ray at any
point , the growth rate of money during the interval
from the base period to that point is within the 3
to 6 per cent target range . For example , the level
of the money supply in May is within the ray , so
money' growth rate from March to May i between
3 and 6 per cent. In June, however, the level of
the money supply i above the ray , which means the
March-June money growth rate exceeds the 6 per
cent upper bound of the target growth rate range.
A problem with assessing target achievement by
using the ray approach is that the method places
rather narrow limits on short-term variations in
money growth during the initial part of the target
period . As such, undue emphasis might be accorded
the short-term behavior of the aggregates in the
initial phase of the period. On the other hand , the
ray approach allows wide variations in short-term
growth rates during the later parts of the target
period. In Panel A of Chart I, for example , the
growth rate of money in April must be between 3
5

Is the Federal Reserve Hitting

Chart 1
MONEY SUPPLY AND TARGET RAYS
A Hypothetical Case
Dollars

PANEL A

3.0-1.

Year 2
Dollars
///

/
/

/ /
/

PANEL 8

/ \

..,__,.,6.0-/e

/
/

/
/
/

//
/
/

/
/
/

/
/

and still allow money to be within the target ray.
The problem of narrow limits in the initial part
of the target period can be resol ved in several ways.
Reasonable deviations from the ray may be accepted , or the ray may be widened somewhat for
the initial part of the period. The problem of wide
variations in the later part of the target period isin practice-automatically resolved. That is because , prior to the end of any target period , a new
target period and a new money growth rate range
are established . The ray for the new period puts
limits on acceptable short-term growth rates in the
initial part of the new period, which is the later
part of the previous period.
T he practice of establi hing new target period
prior to the end of the previou. periods co mplicates
the a es ment of targ t achievement. It mean that
the mo ney suppl y at any point in time may be compared with more than one target ray. Panel B of
Chart 1 illustrates a case wi th two target rays. The
ray from Panel A is show n in Panel B and another
ray is added . The second ray as sumes a target
period from June of Year 1 to June of Year 2, and
a target growth rate range from 3 to 6 per cent. The
starting point of the new ray is the money supply 's
actual level in June of Year 1, the new target
period 's base period. 4 For any point after June of
Year 1, the money supply may be compared to both
rays. For example, in Jul y, August, and September
money suppl y target established in March were
achieved , but those e tabl i hed in June were not
achieved. In October, November, and December,
however, both targets were achieved.

/
/

AN ASSESSMENT OF TARGET ACHIEVEMENT
The ray approach described in the preceding
section is now used to assess the extent that the

/
/
/

,:.,

J A- S
Year I

A M
Year 2

and 6 per cent for the money supply to be within
the ray in April. The growth rate in January, however, could range considerably beyond these values
6

4/T he actual level of the money suppl y is not the on ly possible choice
for the base le vel. An alterna ti ve would be the level of mo ney th at
wo uld have ex isted in the base peri od if, dur ing the interval from the
previo us base period to the new base period, money had increased at a
rate eq ual lO the mid po int of the previous target growth rate range. This
altern ative can be referred to as the · ' midpoint '" method o f se lecting a
ba e leve l. Under this method , new rays wi ll a lways fall within all previously established rays as lo ng as the target growth rate range does not
change . Thus, if money is wi th in any partic ul ar ray , it is within all
previous ra ys , also. In other word s , if money supply tar gets es tabli shed
at any particular time are ac hieved, targets established at all previo us
tim es are also ac hieved .

Federal Reserve Bank of Kansas City

Its Money Supply Targets?

money supply targets are being achieved . In using
the ray approach , it is first necessary to select a
type of time series for money to use in comparing
money growth with the target rays. A number of
time series could be selected , including quarterl y,
monthly, weekly , or multi-weekly time series.
Mo ving averages of these periods also could be employed. The method u ed in this article i to elect
the same period length fo r the time series that the
Federal Reserve employs when designating the
base le vel. Thus, if the Federal Reserve uses a
month for the base perio , a monthly money supply
series is used to co mpare with the target rays . If
the Federal Reserve designate a quarter as the base
level , a quarterl y series is employed to com pare
money with the target rays .
Sp cifi ally, a mon thl y time ·eri i u ed h re
to compare the behavior of mon y with the target
ray for the target period begi nning in March 1975
because the base level for the March target period is
the month of March . For the target period beginning in the second and third quarters of 197 5, a 3month moving average series is elec ted because
the base level for these target periods is the average
level of money in the second and third quarters,
respectively. Also, by using a 3-month moving
average series, an assessment of target achievement
can be made each month. If an ordinary quarterly
series were used , an assessment could be made only
once each quarter.
Target achievement fo r the March 197 5-March
1976 target period can be assessed with the help of
Chart 2 . Ordinary monthly time series fo r Ml, M2,
and M3 are shown in the chart along with a target
ray for each measure of the money supply. 5 Each
ray ' s starting point is the actual level of the money
supply in March 1975 , the month the Federal Re-

5/The analys is of target ac hievement in th is article is co nfined to MI,
M2, and M3 beca use growth rate ranges for these money suppl y measures we re give n in eac h of the Federal Reserve's consultative report s to
the U. S. Congress . ln the firs t and second reports, a grow th rate range
was ind icated for the ba nk credit proxy . In the third report , however, a
target fo r the cred it proxy was not given .
C urrent e timates of money supp ly data are employed in this article.
Experie nce suggests, however , that these data may be subseq uen tly revised. Substan ti al revisio ns coul d alter the conclu ions of not only
this article but of any assess ment of target achievement.

Monthly Review • February 1976

serve designated as the base period . For example ,
the starting point for the M 1 ray in Panel A of
Chart 2 is $284. l billion , the level that MI averaged
in March 1975. Boundaries for the rays are established by the target growth rate ranges for the March
1975-March 1976 target period .
As seen in Chart 2 , Ml was outside the March
1975-March 1976 target ray during most of the initi al part of the target period. However, MI moved
into the ray in September and remained inside the
ray from October through December , the latest
month fo r which data are available . The behavior
of M2 relative to its target ray was similar to that
of M 1. After moving outside its ray in the first
part of the target period , M2 fe ll wi thi n the ray in
the last fo ur months of 1975. (S e Panel B, Chart
2 .) M was above its target ray throughout mo t of
the period fro m April 1975 to November 1975, and
then moved within the ray in December 1975.
Target achievement for the second quarter
1975-second quarter 1976 period and the third quarter 1975-third quarter 1976 period can be assessed
with the help of Chart 3. This chart shows the behavior of money relative to the target rays for both
target periods. The two periods are treated in one
chart because the base ,levels of both periods are
averages of data for a quarter. For the same reason,
3-month moving average series for M 1, M2, and
M3 are used in Chart 3 to compare the behavior of
money with the target rays. The starting points for
the rays applicable to the second quarter-second
quarter target period is the level that money averaged in the second quarter of 1975 , i.e. , in the three
months ending June 1975. Similarly, the starting
points for the rays applicable to the third quarterthird quarter target period is the level that money
averaged in the third quarter of 1975 , i.e. , in the
three months ending September 197 5. 6 Each ray ' s
boundaries in Chart 3 are established by the target
growth rate ranges.

6/ln Chart 3, the start ing po ints for the target rays and the 3-month
movi ng average series are shown on an end -month-of- quarter basis. For
example, the starting point fo r the second q uarte r target ray , whi ch is
the average level of mo ney in the 3 months end ing June 1975 , is plorted
as of the month of June .

Is the Federal Reserve Hitting

Chart 2

MONEY SUPPLY MEASURES AND TARGET RAYS
March-March Target Period
Billions of Dollars

Billions of Dollars

300

1100

PANEL A

1075

1050

1025

285
M

JASON
1975

F
1976

Billions of Dollars
675

625

As seen in Chart 3, Ml was above its second
quarter 1975-second quarter 1976 target ray in the
initial part of the target period . M 1 moved into the
ray in September and stayed within the ray in
8

October and November. In December, however,
Ml fell slightly below its second quarter-second
quarter target ray . M 1 has remained below its third
quarter-third quarter ray throughout the period that
the ray has been applicable.
Similar to Ml , M2 was above its second quarter
1975-second quarter 1976 ray in the initial part of
the target period . M2 then fell within the ray in
September, October, and November and moved
below the ray in December. (See Panel B .) M2
joined Ml in falling below the third quarterthird quarter ray throughout the applicable period .
Panel C of Chart 3 shows that M3 was above
its second quarter-second quarter ray from July
through November, and fell inside the ray in
December. M3 has moved within its third quarterthird quarter ray throughout the applicable period.

CONCLUSIONS
Several conclusions can be drawn from this
article 's assessment of the extent to which the FedFederal Reserve Bank of Kansas City

Its Money Supply Targets?

Chart 3

MONEY SUPPLY MEASURES AND TARGET RAYS
Second Quarter-Second Quarter and
Third Quarter-Third Quarter Periods
Billions of Dollars

Billions of Doi Ion

/ / / ::CU¾
LrOO
:;

298

/
:;

PANEL A

PANEL C

1075

294

l()f)O

290

1825 J.___J
....._

S
1975

670
,,,, -1.&•1.
,,,,/

... 8 .5"1.

PANEL B

660
M2
(3-month movino

overooel

650

640

1975

1976

Billions of Dollars

_._A----'-s----'-o----'N--0...___....
J _ __,__F_ __,

1975

F
1976

eral Reserve is meeting its money supply targets .
One conclusion is that the actual behavior of the
money supply meas ures has tended to be more on
target in the later stages of target periods than in
M onthly Review • February 1976

the earlier stages. Target misses in the earlier stages
should not be unexpected, thongh , because precise
short-term control over money is diffic ult to
achieve . Control oveI· longer periods is more
precise because Federal Reserve actions affect
money with a time lag . Also, actions designed to
con:ecct errors in the first part of the tar;gei periods
help to keep money on target in the- later stages of
the target periods.
Another conclusion is that, in the later part of
1975 , M3 moved in line with its target more closely
than either Ml or M2. For example , in December,
M3 was in line with the target specified for the
period from the third quarter of 1975 to the third
quarter of 1976. Also, M3 in December was consistent with targets specified for the second q uarter
1975-second quarter 1976 and the March 1975March 1976 period. However, in December Ml
and M2 were in line with only the March-March
targets and were below both the second quarterseco nd quarter and third quarter-third q uarter
targets.
9

Is the Federal Reserve Hitting Its Money Supply Targets?

The difference between the behavior of the
money supply measures relative to their targets
underscores a basic problem inherent in ,establishing and attempting to achieve multiple money
supply tar:gets. The problem arises because the Federal Reserve .has lime ability to control one of the
monetary aggregates independently of others.
Actions designed to expand or contract one aggregate will generally tend to ,expand or contract the
other aggregates. Thus, for each of the targets to
be achieved, the set of targets must be consistent
with one another. If inconsistencies develop, however, which is likely in a dynamic economy, the
Federal Reserve will be faced with a dikmma. For
example, if the System had acted more vigorously
to ex pand the monetary aggregates in the later part
of 1975, Ml and M2 may have been kept withj,n
their second quarter- e ood quarter and third quarter-third quarter target rays . However, such action
also may have pushed M3 above its target rays . In
brief, after a -set of targets has been established
and then divergences ocour in the _gmwth .patterns

.rdative to the targets, it is difficult for the Federal
Reserve to correct for the divergent behavior in the
aggregates.
A final conclusion is that care should be taken
to avoid simple generalizations regarding whether
,or not the Federal Reserve is hitting its money supply targets . The existence of multiple money supply
targets combined with multiple target periods suggests that any such generalizations could easily be
misleading. As the evidence presented here has
shown, some of the money supply targets are being
met for certain time periods and some are not.
Especially misleading would be simple generalizations ba ed on comparing money growth rates for
short-term periods with targeted growth rate ranges.
Such compariso ns may wrongly imply that money
supply targets are not be ing achieved because
short-term movements in the aggregates ar so metime quite volatile . The ray approach used in thi s
article helps avoid misleading comparisons by placing the assessment of target achievement in a longer
run perspective .

fn early February , Chairman Burns presented to the House Committee on Banking , Currency, and Housing the target growth rate ranges
of the monetary aggregates for the year ending in the fourth quarter of
1976. These ranges differed only a little from those announced previously . For M2 and M3, the growth ranges remain at 7. 5 to 10. 5 per cent and
9 to 12 per cent, Tespective1y . The growth range for M 1 has been widened
somewhat, to a 4.5 to 7 .5 per cent range, from t he previous range of 5 to
7 .-5 per cent. The lowering of the bottom end of the range takes into account, among other factors , the transfer of funds from demand balances
to business savings accounts at commercial banks-a development that
Jowers the grow.th rate of M 1 but leaves unaffected the growth rates of
M2 -and M3_

Federal Reserve Bank of Kansas City

UNEMPLOYMENT INSURANCE
Part I : Program s and Procedures

By Steven P . Ze ll
ike many of this co untry's major soc ial programs, the Federal-state sys tem of unemployment compensation had its inception during the
Great Depress ion . Since that time the program has
grown in both size and scope far beyond the level
envisioned by its creators. A subject of controversy
years before economic and soc ial conditions made
its existence essential, the unemployment insurance
system is now undergoing both its greatest expansio n and its closest scruti ny.
Two examples of the tremendous growth of the
system are seen in the annual benefits paid and the
number of new beneficiaries . In 1940 , one year
after all of the states began paying benefits, 5. 2
million perso ns received their fi rst benefit chec ks
and $519 million in benefits were paid. By con trast,
it is estimated that under the same regular state
programs , over 12.2 million persons began a period of compensated unemployment in 1975, and
total benefits paid to these persons and to those
continuing their unemployment from 1974 exceeded $12 billion. In addition, another $4.3 billion in
benefits was paid under two recently enacted extended benefit programs . 1
Yet, despite the fact that the unemployment insurance (UI) system directly affects millions of

I/Unemploym ent In surance Financial Data. 1938- 1970 , U. S. Depart ment of Labor, Manpower Admini stration , 197 1, pp . 141 -46, and In f ormation on Unemp loyment and Un employment Compensation Pro grams, prepared fo r the Subco mmittee on Unempl oyment Compe nsatio n ,
Ho use Com mittee on Ways and Means , Septe mber 22, I 975, Ex hibit
12 (U . S . Department of Labor es tim ates , rev ised January 1976).

Monthly Review • February 1976

families, employ s about I 00 ,000 persons, and costs
over $ 1 bi ll ion to administer, very fe w Americans
really unde rstand its fun cti onings . This articl e provides a guide to the Ul system by examining three of
its most im portant aspects: its programs, its procedures, and its problems.
ORIGIN AND OBJECTIVES

While the unemployment insurance system has
undergone numerous changes since its inception ,
much in it has remained the same . In particular ,
its original philosophical underpinnings-who
should be compensated, under what conditions, and
for how long-have influenced the system throughout its existence . Thus , to understand the current
system, it is first necessary to examine it at its
beginning .
Origin

The Federal-state system of unemployment insurance originated in 1935 as Titles III and IX of
the Social Security Act. The concept of unemployment insurance, however, was not new to the
Great Depression. As early as 1920, Professor John
R . Commons of the University of Wiscon si n succeeded in having a bill for a state program introduced into the Wisconsin legislature and finally
in having it passed in 1932. Even before that date,
many state legislatures had discussed the desirability of some form of unemployment insurance, yet
each was unwilling to levy a tax against its em11

Unemployment Insurance

ployers that was not also levied by its neighboring
states.
Recognizing that some form of Federal legislation was necessary , President Roosevelt appointed
the Committee on Economic Security in June 1934
and asked it to draft a comprehensive program for
the income protection of the unemployed . Realizing that the depression-level unemployment had
national causes and thus required national solution s, the Committee members recommended a
joint Federal-state unemployment system for several reasons . Some of the member preferred to see
labor and social legislation administered on the state
level , at least partly in fear of the results of imposing
a uniform system on the diversified U . S. economy.
For the most part , though a state administered system wa proposed on the expectation that a purely
Federal system would be declared unconstitutional
by the Supreme Court . As hall be noted later, a
similar fear strongly influenced the definition of the
objectives of the system.
In establishing a framework for the system , the
Committee was influenced by both the enormous
debt accumulated by the British system of unemployment compensation , as well as by the overly
high cost estimates made by its own actuary. As a
result, it recommended limiting UI benefits to a
maximum of 12 to 16 weeks, with an opportunity
for government employment for tho e who remai ned unemployed after they ex hau sted their
benefit . 2
As finally enacted by Congress, a provision of
the Social Security Act (later incorporated as part
of the Internal Revenue Code and called the Federal
Unemployment Tax Act) established a Federalstate unemployment insurance system based on the
Committee's recommendations. Under the law , the
states were individually free to join or not join the
system and to adopt coverage and benefit provisions
as they saw fit. To "encourage " the states to join ,
however, the law provided that certain categories
of employers with eight or more workers must pay

2/ Merrill G . Murray, Income f or the Unemployed ( Kalamazoo: T he W . E.
Upjohn Institute, April 1971 ), pp . 7-8 .

a Federal tax equal to 3.0 per cent of their payroll.
This tax was due the Federal government whether
or not a state had an unemployment insurance law.
However, employers who were covered by both
the Federal law and by a state law meeting certain
Federal requirements could deduct 90 per cent (or
2. 7 per cent) of this tax liability by paying this portion to the state for use in the payment of unemployment claims. 3 The 0 .3 per cent that went to the
Federal government was to pay all of the administrative costs of the program.
At their option, states could offer broader or
narrower coverage than that specified by the Federal law . But since narrower state coverage penalized uncovered employers (who were still liable
for the Federal tax) without benefiting the tate ,
there was littl incentive to adopt thi option. Effectively, then, the choice available to the states
wa whether or not to join a costless unemployment
insurance system. Employers in the state paid the
same tax in either case. The result was that by 1938 ,
every state , as well as Alaska, Hawaii , and the District of Columbia , had joined the system. Puerto
Rico joined the system in 1960.
Primary Objective

The new unemployment insurance system was
a radical departure from previous welfare and relief programs. The primary objective of the new
system was, literall y, to insure individual workers
against loss of wages as a resu lt of adverse economic conditions. The beneficiaries of the insurance
were individuals who earned their benefits by virtue
of prior employment and whose benefits were proportional to their prior earnings (as a proxy for lost
wages). This contrasted sharply with existing welfare programs which were aimed at families, and
whose benefits were determined on the basis of
needs. 4 The original UI programs were thus clearly
designed for a very specific clientele , and the continuing efforts at both the Federal and state levels
3/ As shall be ex plai ned , empl oyers may continue to take th e full 2. 7
per ce nt credit even if the ir state UI tax rate is bel ow thi s level , provided that it has bee n so red uced through expe rience rating.
4/George S . Roc he , Entitlement to Unemployment Insurance Benefits (Kalamazoo: W . E . Upjohn Institute, September 1973), p . I.

Federal Reserve Bank of Kansas City

Unempl oyment Insurance

to circumscribe the group of beneficiaries represents perhaps the strongest influence on the development of the system and its regulations.
In particular, the program was never intended to
protect all workers against all wage losses. Instead,
it attempted to adhere to some loose common notion of the type of worker who should be compensated, and , seemingly more important, of the
type of worker who should not be compensated and
the type of behavior that wa unacceptable for a
worker who really wanted a job. This attempt to
define who may or may not be compensated is
largely responsible for the enormous complexity
and diversity of the state law today. 5
The sy tern was specifically aimed at the unemployed regular worker, a full-time worker who
had ju t lost a permanent job due lo economic co ndition and who would either be r hired or wou ld
find new , permanent employment. Unemployment
benefits were intended to be of relatively short duration . On the other hand, the system specifically excl uded the highly seasonal worker through its explicit exclusion of agriculture and its initial requirement that covered employers must employ
eight or more workers for at least one day in each
of 20 weeks. Finally, many of the complicated entitlement provisions and disqualifications which
today apply to all claimants originated as legislative or administrative responses to the problem of
paying benefits to workers who were neither "regular" nor "seasonal ," but rather who operated in
that part of the labor market now increasingly referred to as the "secondary sector. " 6 The labor
market attachment of both seasonal and secondary
sector workers was suspect, and this was viewed
as grounds for disqualification.
Other Objectives

In addition to its primary objective of providing protection against wage loss , the system as
established incorporated three other general goal :
(1) stabilizing the economy in the face of an eco5/l bid, pp . 6-7.
6/lbid , pp. 6- 11 . See Steven P. Zell , .. Rece nt Develo pments in the
Theory o f Unemployment,' ' Federal Reserve Bank of Kansas City
Monthly Review, Se ptember-Oc tober 1975, pp . 7- 10.

Monthly Review • February 1976

nomic downturn by maintaining the purchasing
power of laid-off workers; (2) establishing economic incentives to encourage employers to stabilize their employment; and (3) providing placement, training, and counseling services to unemployed workers to assist them in finding employment. 7
The first of these goals , stabilization of the
economy, represents one of the strongest arguments in favor of the UI system. It is predicated
on the belief, later espoused by Keynes , that government transfer payments in an economic downturn will tend to moderate that decline by maintaining purchasing power and thus preventing a
drastic cutback in consumption in the face of lost
wages. 8
The second of these goal , tabilizing the employment practices of employers, was adopted to
varying degree by the tates. Basically, it was
hoped that if employers perceived that their UI tax
rate would rise with the frequency of their layoffs ,
they would be encouraged to practice a more stable
employment policy. This would be accomplished
through what is known as experience rating. Under
this system, separate accounts exist for each employer, and these accounts are credited with all tax
payments he has made and charged with all benefits paid to his workers who have become unemployed and are eligible. The net balance determines his "experience" and his tax rate, usually
within some specified range . The effectiveness of
thi procedure as implemented i questionable ,
however, and some of its problems will be discus ed later in this article.
The third general objective was to provide a
program to assist the unemployed in finding reemployment as soon as possible. Accomplishment
of this goal was attempted principally through affiliating the UI system with the U. S. Employment
7/ Roc he , p. 2. While these we re all legi ti mate objectives , they were
adopted, in part , to pro vide '· an element of public in teres t th at was
needed if the co urts were to ho ld the [Federal and state] laws consti tuti o nal as a va lid exerc ise of ·po lice power' und er which o ur governments can ac t to protec t the general we lfare ," rather th an dec laring
' ' that the taxes were a taking of private property without due process
of law . ... "
8/The symbol of the UI sys tem is a gyroscope wi th the words, · ·Unem ployment Insurance • Inco me Stabilizer."

U nem ployment Insu r ance

Service (ES) which had been created in 1933 under
the Wagner-Peyser Act. All UI claimants were, and
still are, required to register with the ES as a prerequisite for receiving benefits. The public employment office was supposed to verify both the claimant's availability and willingness to work (two prerequisites for benefits in all states) , test the applicant 's abilities, and provide suitable job references.
For many years, the ES was so inundated by this
affiliation that it became known as the '' unemployment service.'' Currentl y, the ES has expanded its
services to aid other special population groups , and
the UI system has taken on more of the responsibility of verifying the appropriate job search of its
claima nts. The ES and UI system remain cooperative but independent programs administered by the
Employment arid Training Administration (formerly the Manpower Administration) of the U.S . Department of Labor.
TERMINOLOGY AND PROCEDURES: MISSOURI

One of the best ways to understand the data ,
terminology , and concepts of unemployment insurance is to consider them in the context of the
actual operations of a representative state system.
For this purpose, this article examines the reg ulations and procedures of the Missou1i Division of
Employment Security (MDES). 9
In Missouri , as in all other states, the great majority of UI clai mants and most of the benefits paid
are administered under the regular state program.
In addition, each state also administers separate
'' regular' ' programs for ex-serv icemen (UCX) and
for ex-Federal civilian employees (UCFE). The
rules and regulations governing these separate programs vary from state to state but are the same as
those that pertain, to each state's own regular program_ 10
Not all workers, however , are eligible for benefits under the regular UI programs. Above and beyond the qualifying procedure through which every
9/The author is indebted to John A . Moorman, Claims Supervisor , for
his kind cooperation in providi ng informatio n on the operations of the
Misso uri Divis ion of Employment Securit y. Additional info rmation was
obtained from a publication of that Division, " Introducti on To Unemployment insurance,'' May 1975 .

claimant must pass , an unemployed worker who
seeks to collect unemployment compensation in
Missouri must first have been employed in covered
employment for at least two quarters and earned
sufficient wage credits there to qualify as an insured worker. 11 With the exception of employment in such specifically disqualified sectors as
agriculture and domestic work, from 193 7 to 1955
covered employers (those subject to the Federal
unemployment tax on their payrolls) were defined
as those who employed eight or more workers in
at least 20 weeks during the calendar year. The
present Federal standard, effective since January 1,
1972 , defines covered employers as those employing one or more workers for at least l day in each
of 20 calendar week , or having a payroll of $1,500
or more in any calend ar quarter. 1 2
A worker in covered employmen t in Misso uri
who becomes unemployed begins the procedure to
collect unemployment compensation by reporting
to hi s local Missouri Division of Employment
Security (MDES) office. There , he first registers for
work with the Employment Service. The job of the
ES is to collect a detailed summary of the applicant's qualifications and work history and to try to
match him with a suitable job opening which has
been listed with the service by a cooperating em-

I 0/Railroad workers have a co mplete ly se parate syste m administered
by the Rai lroad Retirement Board. Eac h slate syste m also ad ministers
a Federal-State Ex tended Benefits (EB) program and a Federal Supplemental Benefits (FSB) program for individual s who have ex hausted the ir
regul ar benefits (including ex-serv icemen and ex-Federal c ivilian employees) and a Special Unemploy ment Assistance (SUA) progra m for
so me population groups previously not covered by UI. T he E B program
is a permanent part of the sys tem while both the FSB and SUA progra ms are temporary . The general purpose of these three programs, whi c h
wen t into effect when the unemployment rate exceeded a specified level ,
is to alleviate the se vere effects of the present recession on employ ment.
See Part II of this article in a subsequent M onthly Review for a more
detailed examination of these special extended programs .
I I/The specific wage eligibility requirements are discussed in detail
later . Because of these restrictions on covered employme nt and wage
eligibility, new entrants to the labor fo rce and many reentrants who have
not been em pl oyed fo r some time, are not eligible to rece ive unemployment compensation, although they may techn ically be unemployed by the
usual definition . See Steven P. Zell , " A Labor Marke t Primer," Federal
Reserve Bank of Kansas C ity Mo nthly R eview. January I 975.
I 2/Thirt y-one states, inc luding Missouri, use this defin ition of covered employment. The remaining states generally provide broader coverage . In addition , from January I , 1972 , UI co verage througho ut the
nation was extended to workers in state hospitals, colleges and universities, and to workers employed by certain nonprofit organizations which
employ four or more workers in a calend ar q uarter. Self-employment is
excluded from coverage in all states . For further exclusions and qualification s, see: lnfo rmario n on Unemploym ent and Unemployme nr
Compensarion Programs , pp . 5-6 .

Federal Reserve Bank of Kansas City

Unemployment Insurance

ployer. No fee is charged to either the employer
or the applicant for thi s service. Following this
application, the unemployed worker moves to the
une mpl oy me nt insuran ce section and files his
initial claim .
Filing a Claim

The initial claim , a notice fil ed by a worker that
he is starting a new period of unemployment, is
the keystone of the UI ystem. In Missouri, as in
all states except ew Hampshire, it establishes both
the worker' benefit year and base period.
The benefit year is a I -year period generall y beginning with the first day of the week (Sunday , in
Missouri) in which an ini ti al cl aim i fil ed . The
base p ri d is a l-year period preceding the filing
of the initial claim . In Mi ouri, and in th majority
of tates, thi p riod is the fi r t fo ur of the la t five
completed calendar q uarter prior to the beginning
of the benefit year. For example, if an in itial claim
is filed in a week in which the Sunday fa lls in either
Ju ly , A ugust , or September of 1975 (the third quarter), the benefit year extends fo r the next 52 weeks.
The base period does not include either the uncompleted third q uarter of 1975, or the second quarter ,
known as the lag quarter. Instead, it incl ud es the
1st quarter of 1975 and the 4th , 3rd, and 2nd quarters of 1974 . The base period thu s ru ns fro m April
1, 1974 through March 3 1, 1975. The claimant's
earnings in covered e mployment during the ba e
period determine both the weekly benefit and the
total amount of benefits which he can receive during the benefit year .
After an initial cl aim is fil ed in Missouri, the
worker is given an identification card and is told to
report back to the office , generally in 2 weeks .
During this 2-week period , two determinations are
made. The first is whether the claimant is eligible,
by virtue of having accumul ated sufficient wage
credits in his base year , to qual ify as an insured
worker. In Missouri , to qual ify as an insured worker, a claimant must have been paid wages in covered employment of $300 or more in one q uarter
of his base period, earned some wages in at least
another quarter, and received total base period
Monthly Review • February 1976

wages of at least 30 times his Weekly Benefit
Amount. 13 The second determination, to be discussed below, is whether the worker had done anything in his base period work experience which
might disqualify him from receiving benefits. If he
is found to have earned sufficient wages to be
eligible , he is notified by mail and told his Weekly
Benefit Amount, his Maximum Benefit Amount, the
wages that were paid him by each employer in each
quarter of his base year, and the start of his benefit year . 1 4 These data are automatically calculated
for each claimant with eligible wage credit even if
he never actually collects any benefits . 1 5
The Weekly Benefit Amount (WBA) in Missouri is simply the payment that an eligible claimant may receive for each week he is unemployed .
ubject to an $85 maximum and a $15 minimum ,
the WBA is calculated a 1/20 of the total wage
paid to the claimant in that ba e period quarter in
whic h his highest wage were earned.
Most other states al so calculate the WBA as
some fraction of the highest quarterly wage
(HQW) , the rationale being that earnings in the
high quarter are considered to most nearly reflect
the wages that would be lost by unemployed fulltime workers. As noted earlier, of course , compensating these workers was. the central emphasis of the
original system . Thus , if the fraction of HQW
compensated is 1/26, a worker with 13 full weeks
of employment in his high quarter will rece ive a
weekl y compensation of 50 per cent ( 13/26) of hi s
lost average weekly high quarter wage in each week
of unemployment , provided this figure does not
exceed the statutory maximum. Missouri ' s provision of 1/20 of the HQW is more liberal , and is
based on the premise that for many workers , even
the highest quarter of earnings may include some
unemployment. Of course, this means that some
claimants who worked 13 weeks in their high quar13/See defini tion in the fo ll owin g paragraph . Note that th e two q uarter
earnings req uireme nt i included to avo id payi ng benefit s to sea onal
and econdary sec to r workers .
14/T he wage data fo r eac h e mpl oyee are subm it1ed by employers to the
MO ES at the e nd o f eac h cal e ndar quarter and recorded by the worker 's
soc ial sec ur ity number.
15/ An e lig ibl e worker might never co llec t benefits if he either fin ds a
job in a few days or is subsequentl y disqualified fo r a variety of reasons
to be disc ussed later.

Unemployment Insurance

ter will receive as much as 65 per cent of their average weekly high quarter wage. 16
S im ilarl y , the Ma x imum Bene fit Amo u nt
(MBA) is the total a claimant is eligible to receive
in a benefit year. It is calculated by crediting him
with the wages actually paid to him in insured work
during each q uarter of hi s base period or with
$2 ,2 10 per q uarter , whiche ver is less . T he MBA
is then fu rther restricted to, at most , 26 times hi
W BA while not exceeding l/3 of his total allowab le
wage cred its . These restrictions were establi hed
because it is the MBA , in conjunction w ith the
W BA , w hich determ ines the potential duration of
be nefits in weeks , up to a statutory max im um of 26
weeks of compensatio n . T he way these concepts in teract can best be understood by co ns ide rin g the
examp le in the adj o in ing bo x .
T o recapitul ate , fo ll owi ng the filin g o f hi s initi al
claim , the wo rker is tol d to re port back to the MOES
office , generall y after 2 weeks. During th i time ,
the worker' s wage cred it e ligib ility is determined .
In addition , all of hi s forme r base period emplo yers
are notified by ma il that the unemployed worker is
fi ling a claim. While 33 states consider that the circumstances of the worker ' s last separation are the
only ones affecting his entitlement to benefits, Missouri and 18 other states consider all separations in
the base period . G enerally speaking , if the worker
either vo luntaril y left work w ithout good ca use attri butable to hi s work o r to hi s empl oyer , was d i mi sed for mi sconduct, o r refused to accept s ui tabl e
wo rk, vari o us pe naltie s are appli ed to the e m ployee's benefi ts, ra ng ing from the delay of payme nts to the cancell ation of wage credi ts .
When employers are informed of the filed
claim , they have IO days after the mailing of the
notification to contest that claim . The incenti ve for
an employer to contest a claim is provided by the
e xperience rating syste m mentio ned e arlier. Under
this system , tho ugh the basic tax rate paid by an
e mployer in Missouri is 2 . 7 per cent of the first
$4 ,200 of an e mployee' earnings , the rate is fl exible within a range o f 0. 0-3 .6 per cent. 17 T hu s , an
e mpl oyer w ho ha s fe w un e mpl oy me nt c lai m s
16/T hal is . if WBA = 1/20 x HQW , the n W BA = 1/ 20 x (losl wages
per week in HQ) x (no . of weeks in HQ) and ifno. of wee k in HQ = 13 ,

EXAMPLES
Man A worked 10 weeks per quarter in each of three quarters
in his base year and 12 weeks in the fourth . In all cases, his average weekly wage was $120 per week.
Total
Allowable
Benefit Duration
Earnings Wage Credits HQW WBA ~ ---'-(w_ee_k___
s)_ _
$5,040
$5,040
$1 ,440 $72 $1,680
23.3
1. HQW = (12 weeks/quarter) x ($120/week) = $1,440/quarter.
2. WBA = HQW + 20 = $72/week.
3 . MBA = 26 x WBA = $1 , 872 but not exceeding
MBA = 1/3 x Allowable Woge Credits = $1,680.
4. Benefit Duration = MBA + WBA = ($1,680) + ($72/week) =
23.3 weeks .

Man B worked in all 52 weeks in his base year at $150 per week .
Totol
Allowable
Benefit Duration
Earnings Wage Credits HQW WBA MBA _ _
(w_e_e_ks_)_ _
$7, 800
$7, 800
$1 ,950 $85 $2,210
26
1. HQW = (13weeks/quorter)x($150/week) = $1 ,950/quorter .
2. WBA = HQW + 20 = $97.50 but not exceeding $85 .00
maximum .
3. MBA = 26 x WBA = $2,210 but not exceeding
MBA = 1/3 x Allowable Woge Credits = $2,600.
4 . Benefit Duration = MBA + WBA = ($2, 210) + ($85/week) =
26 weeks.

Mon C worked in only three quarters in his base year for 13 weeks
per quarter . He earned $230 per week in two of the quarters and
$250 per week in the third quarter.
Total
Allowable
Earnings Woge Credits HQW WBA
$9,230

$6,630

MBA

$3,250 $85 $2,210

Benefit Duration
(weeks)
26

1. HQW = (13 weeks/quarter) x ($250/week) = $3, 250/quorter.

2 . WBA = HQW + 20 = $162.50 but not exceeding $85 .00
maximum.
3. Allowable Wage Credits = Total Earnings not exceeding $2, 210
per quarter = $6,630.
4. MBA = 26 x WBA = $2,210 but not exceeding 1/3 x Allowable
Wage Credits = $2,210.
5. Benefit Duration = MBA+ WBA = ($2,210) + ($85/week) =
26 weeks.
NOTE: The percentage of average high quarter weekly wages reimbursed was, respectively, for

Mon A: 78/120
Mon B: 85/ 150
Man C: 85/250

= 65 %;

= 56.7%;
= 34%.

then W BA = 13/20 x lo I wage. pe r wee k in HQ. !fa worker's 10s1 wage s
we re high eno ugh 1ha1 th i ex press io n e eeeded $85 per wee k, however,
1he pe rce nt age of his 10s1 wage 1ha1 wo uld actu all y be re imb ursed wo uld
be less th an 65 per cenl.
17/ Effecti ve January I , I 976 , thi s wage base was ra ised to $4 ,500 and a
0 .5 pe r cent tax rate sun ax was applied lo all empl oyers . These raises
are an a11e mpt 10 pani all y co mpensate fo r the tremendo us growth in
bene fit s paid o ut by the sys te m during the prese nt recess ion.

Federal Reserve Bank of Kansas City

Unemployment Insurance

charged against his account may eventually end up
paying no state UI tax, while an employer with a
heav ily charged account may pay as much as a 3.6
per cent state UI tax for each employee . Note that
even if an employer pays no state UI tax, he can
stiII deduct 2. 7 per cent from his 3 .2 per cent Federal UI tax liability.
Claim Not Contested

Con ider first the case where no ne of the claimant's for mer emp loyers contest the cla im fo r unemployment compensation and no is ue is rai sed by
information furni shed by the claimant. When the
claiman t returns to the MOES office after 2 weeks,
he is asked to file two continued claim card . Each
card certifies that the claimant has just ex perienced
I week of unemp loymen t and th at during that week
he fulfil led three req uirements for el ig ibi lity . First,
he mu t have bee n " availabl e for work" durin g that
week. T hi is interpreted a meaning that the appli cant both desires work and is willing to work under
circumstances in which he might rea onab ly expect
to find work . For example , if he in i ted on working only at a type of job which no longer existed
in his town , he would be declared unavailable and
thu s ineligible for benefits. Similarl y, if he moved
to a remote area where there was little chance of
his finding em pl oy ment in his fi el d , he would be
declared unavailable for work. 18 Second , he had to
have been phy ica lly "able to work" in the type of
employ ment he was seeki ng. And th ird, he must
have been "actively seekin g work " above and beyond merely registering for work with the ES .
Basicall y, he must have been fo llowin g a reason18/ An excellent example of th is rule was tes ted in a New Yo rk State
co urt o n J ul y 5 , 1972. Under what is kn ow n as the ··reci procal benefits"
agree ment , all state have agreed that if a worker earns wage c redits in
o ne state , becomes unem ployed throug h no fau lt of his o n, and moves
to a second tate, he ca n file for Ul benefits, w hic h. if all requirement s
are me t, '.-1/ill be pa id on th ese c redi ts by the first state .
In Janu ar y 1968, the s tate o f ew York began e nfo rcing what was
know n as the · · 12 per ce nt rule· · agai nst pe rsons who had earned wage
cred its in e w Yo rk . were laid ff. and th e n moved to Pue rt o Rico . Th is
rul e stated tha t perso ns c ha ng in g the ir re, id e nce to a geog raphica l area
in whic h the une mpl oy me nt ra te wa s 12 pe r ce nt or hi gher. we re e ffectively re mov ing the mselves fro m wo rk avai labil it y and. the refore , in the
eyes o f the stat e o f Ne w Yo rk . were no lo nge r e li gib le for unemp loyme nt compe nsati o n. In the case e ntitl ed " Vicen te Ca lva n and Marcellino T o rres vers us Lo ui s K . Lev ine. Indus trial Co mmi ss io ne r o f th e St ate
of ew Yo rk . " the co urt dec ided th at whil e the 12 per ce nt rul e was .
constitutio nal , it had been se lec ti ve ly des ig ned and applied o nl y aga inst
appli ca nt s fro m Pue rt o Ri co a nd was thu s illegal in this case.

Monthly Review • February 1976

able procedure , similar to what he had done in the
past, which seemed des igned to result in his finding
employme nt.
If these qualifications are met, and the worker
is not currently participating in a labor dispute, he
is eligible for his first benefits. In his first check,
however , usually received a few days after filing
the first two continued claims, the claimant is only
compe nsated for I week of unemploy ment , because
most states define the first eli gi ble week o f unemployment as a " waiting week ," which is not compensable. All sub equent continued claims for eligibl e week s of unemployment are compensable .
However, in Missouri , if 9 consecutive weeks are
paid , the waiting week at the beg inning will be
compe nsated. 19 Fina ll y, th e worker is given a
a series of dated continued c laim card in nvelopes
and is a ked to co mple te and ma il in one card for
each week of e ligible unemployment that may fo llow. Generally , he must come in to check with the
ES about pote ntial jobs approximately every 60
days. At that time , he will be given more continued claim cards if he has not exhausted all of
his be nefit eligibility . Aside from his certification
on each card that he has satisfied the neces sary
eligibility requirements , no intermediate check is
made on him . After a period of time , however, if
he is st ill unemployed , he will probably be required
to lower the wage level he considers acceptable
and/o r to broade n the work categories he con iders
suitabl e. In addi tion, once every quarter , all claims
a nd earnings reco rd s are audited to determine
whether any empl oyee worked in a week in which
he also rece ived be nefits .
If a worker collects some benefits in hi s benefit
year, is reemployed fo r a few weeks , then is laid
off before the expiration of his benefit year , he files
a renewed claim. This allows him to receive the remainder of his benefit entitlement which was determined when his initial claim was filed. Though thi s
re newed claim is co unted in the published initial
19/T he weekl y co un t o f continued claim s is re fe rred to in the pu b lished
dat a as the a mo unt of insured u11 e111p/oyme111. It is frequ e ntl y, tho ugh
inco rrec tl y, de fin ed as the numbe r o f pe rsons receiving un e mpl oy me nt
co mpe nsatio n . However , because it in c ludes waitin g weeks, as well as
so me clai ma nts who a re s ubsequen tl y de te rm ined e ith e r in e li gibl e by reason of ins uffi c ient wage c redits o r who a re di squalified , it is o ften a s ignifi ca nt o ve rco unt o f the numbe r o f bene fi c iaries . Su rpris in g ly, no exac t
co un t o f the number o f benefi c ia ries is publi shed .

Unemployment Insurance

claim statistics, administratively there is only one
initial claim and one waiting week during any benefit year. If this worker exhausts his benefit entitlement , he cannot file again for compensation until
the first benefit year expires. After that , if still unemployed, he files a new initial claim, establishes
a new base period and benefit year , and, if eligible,
must serve a new waiting week before receiving
benefits. 20
Claim Contested

The alternative to an uncontested claim is a case
where one or more of the former ba e-period employers choose to conte t a claimant 's a sert ion
that he is unemployed throu gh no fa ult of his own
and is thu e li gibl e to rece ive unemployme nt compen sation. Under the Mi ouri law, a cla imant who
would oth rwi se be ligibl to re e ive be nefi t may
be di qu al ified if he e ither: ( I) left hi s job volun taril y without good cause attributable to hi s work
or to his employer; (2) has been discharged or suspended for misconduct connected with his work;
or (3) failed, without good cause, to accept suitable
work offered through the ES or by a former employer. 21 Before considering these disqualifications, it is instructive to examine how employers '
accounts are charged when a claimant collects benefits.
20/" All sta tes that have a lag be tween the base pe riod and be nefi t yea r
pl ace limi tatio ns o n the use of lag-period wage · for the purpose of qu alifying fo r be ne fits in the second bene fit year. T he purpose of these spec ial
prov isio ns is 10 preven t be nefi t e ntitlement in two successive benefi t years
follow in g a s in g le se parat io n from work ," a proced ure know n a,
"' do uble-clipping.,. From Information on Unemployment . . . , p . 8. In
Misso uri , the restri cti o n is that a worker mus t have earned 5 times hi s
WBA in covered em ployment o r 10 times hi s WBA in any e mpl oyme nt
before req ualifying to receive be nefits in a new benefit year. If a worker
file s an initial claim before this, it fi xes his new base and be ne fit years,
though he canno t collec t be nefits until he sat isfies this req uire ment. A
possible advantage in so filing is that it all ows hi s lag-period wages to
be included tn hi s new base year wage credit s. These c redits wo uld be lost
if he did not fil e unt il the seco nd quarter after the e nd of hi s first bene fit
year since the new ba e year in c ludes o nl y the first four of the last five
co mpleted quarte rs .
2 1/ Effec tive September 28. 1975. Misso uri Senate Bill 358 eliminated
the previo us a uto mati c in eli gib ilit y of a pregna nt claimant for 3 month s
prio r 10 the ex pected dat e o f birt h a nd fo r 4 wee ks afte r the birth o f he r
child . Now , dete rmin ati o ns w ill be made for preg na nt c la imants o n the
basis o f the ir individual ab il ity 10 wo rk and o n their avail ab ilit y.
In 19 o the r sta tes , preg nancy i still gro und s fo r an automati c di squa li fica ti o n . This po licy appears lik ely 10 be inva lidated , howeve r , by a
November 18, 1975 S upre me Co urt dec isio n . In a Utah case. th e Co urt
rul ed that the pres umpti o n that all wo men in o r beyo nd th e ir six th mo nth
of preg nancy a re un able to wo rk is a vio lati o n of the 14th Ame ndm e nt.
Lesley Oelsne r , " Supre me Co urt Upho lds Job less Pay In Pregna ncy."
New York Times. ovember 18, 1975 .

If a filed claim is not contested, benefits are
drawn and charged to the accounts of base period
employers in reverse chronological order. A maximum of one-third of the wages paid by any base
period employer can be charged against him , but
these charges cannot exceed one-third of $2 ,210 for
any base period quarter or a total of $2 ,210 for the
entire base period. Total charges to all employers
cannot exceed the maximum benefit amount for
which the claimant is eligible. If, however , a claimant is disqualified for any of the above reasons, a
variety of penalties, depend ing on the offense , will
be assessed.
The typical penalty is a delay in the payment of
benefits. If a claimant is till unemployed after
erving hi pe nalty period , he i , in ge neral , entitl ed
to rece ive hi full b ne fit (fo r each ub equ nt
week of unemployment) fo llowing a waiting w k
which must be served at the end o f hi di qualifi cation . However, hould the di sq ualifying e mployer' s account be reached in the process of paying
these benefits, it is fully protected against being
charged . Instead , a special fund , set up for this
purpose , pays the benefits. This protection tends,
over time , to improve the experience rating of the
employer and , thus, to lower his tax rate. 22
The 19 states that determine benefit entitlement
on the basis of all job separations in the base period ,
di squalify a claimant who voluntarily left any of
these employers without good cause. In addition, 14
of these states, including Missouri , re trict the consideration of " good cause " to that directly attributable to the claimant ' s work or to his employer.
For example, quitting a job because one disliked
the color of the uniforms would not be good ca use.
However, though quitting a job in order to take care
of an ill spouse would be good cause, it would still
result in a benefit disqualification since it was not

22/O ne o f the c ri tici sms o f ex pe ri e nce ratin g, however , is that the max imum and minimum tax ra tes tend 10 greatl y a tt e nu ate both the ho ped fo r
job stabilizat ion e ffec t as we ll as the ince nti ve 10 pro test unj ust c laims .
If an e mpl oyer has a s trong s urplu s in his acco unt and is thu s payi ng
the minimum tax rate, a marginal inc rease o r dec rease in the numbe r
o f claims fil ed aga inst hi s acco unt wi ll no t affect hi s tax. Similarly , if
already at the ma ximum tax rate, an e mployer wi th an un sta ble layoff
his to ry has no ince ntive to improve since add itio nal layoffs do not re sult
in any add itio nal cost und er th e UI tax system .

Federal Reserve Bank of Kansas City

Unemployment Insurance

job related. 23 If a worker i di qualified in Mi ouri
for vo luntaril y quitting , the penalty is an indefi nite
delay in benefits until the claimant has worked at
other jobs, earning at least IO times his Weekly
Benefit Amount (determined when the initial claim
wa filed) , and the n is once again unemployed
through no faul t of hi own.
Thi ame penalty i applied in Mi ouri if di squalification res ult from a claimant 's refusal to
accept suitable work . The co ncept of " work uitability " is a largely ubjective one which te nds to
change wi th the duration of unemployment. In essence , a potential job i examined a to the kind of
work it represent , the wages it pays, its working
conditions , and it distance from the clai mant 's
rcsid nee . The e fac tor are then co mpared with
thos
f the typical work ex p ri n e of the cl aim . nl. If th
mparc favo rab ly, he mus t take th job
or be disqualified from r ce iving UI b nefits. In
add ition, just as in the "availabili ty" determination , a worker can not set "s uitability" standard
which are unrealistic give n the communi ty in which
he lives . Finally , if hi unemployment pers ist , a
claimant may be required to accept work which
would have initially been termed " unsuitable ."
If a worker is di qualified becau e he was discharged or suspended for work related misconduct,
the penalty depends on the seriou ness of the offense. Mi conduct i usuall y defi ned as any action ,
detrimental to the intere t of the em pl oyer which
wa either deliberate or within the power of the mpl oyee to control. Thu , di mis al due to an ab ence
for an illness might not be a di qualifying offense,
while discharge due to an absence for dru nkenness
or due to an unauthorized trip probabl y would be.
Similarly, an incompetent or unintentionally slow
worker would not be disqualified if he had been
discharged for this reason , while a purposely careless or lazy worker would be disqualified. The penalty for this type of disqualification is a delay in
the rece ipt of benefits from 1 to 8 week . During
23/The law doe spec ify 1ha1 ne ither leaving a job to acce pt a belier
job nor quilling a te mporary job lO return to one· s reg ul ar e mpl oye r i
ground5 for d isqu alifica tio n . Nole, in fact. that in order lO be eli gi ble
for bene fit , a claimanl mu t es tablish th at he i loo kin g fo r full -ti me
wo rk . even if he has a hi sto ry of pan-time wo rk w hic h has g ive n him
monetary eli gibility . This requ irement is an a!lempt to co nform to the
•·reg ular" worker focus of the origi nal UI sy tern .

Monthly Review • February 1976

this period , the claimant is required to file weekly
claims for compen sat ion , but benefit cannot be
started until a waiting week has been served following the end of the period of disqualification .
Lastly , the most serious disqualifying offense is
aggravated misconduct. In these cases , which involve theft , dishonesty , or '' wanton di regard of the
e mployer's intere t which might result in seriou
loss of property ," a dual penalty i applied. Not
only is there an automatic 8-week del ay in the rece ipt of benefits, but all or any part of the claima nt ' s
wage credits earned while employed by the di scharging employer may be cancelled at the di cretion of the UI agent.
E ither party , claimant or employer, receiving an
adver e ruling on a di qualification charg , has th
right to appeal within IO day of the mailin g of th
de termination . 24 Within about 3 week aft r the fi ling of the app al, a hearing is h Id by a r pr e ntati ve of the MDES , known as an appeal referee .
Hearing are informal and based on all available
ev idence although testi mony is taken under oath .
Either party may have a lawyer or a witness present and a decision is usually rendered within 10
days . Further appeals , if desired , may be taken to
the State Labor and Industrial Relations Commission, which is simply a .board of review , and then
to the courts.

SUMMARY
The Federal- tate system of unemployment in urance wa created by the Social Security Act of
1935 as an outgrowth of recommendation made by
President Roosevelt 's Committee on Economic
Security . Membership by the states was not required. However, the Federal Unemployment Tax
that was imposed on each st~te's employers was so
constructed that by 1938 all of the states , as well
as Alaska , Hawaii, and the District of Columbia,
had joined the system. Puerto Rico joined in I 960 .

24/The o ne exceptio n to th is is the case of fo rmer Federal employees ,
w here, by ag reemenl w ith the Sec retary o f Labo r, the Federal Go ernmen t's de terminatio n o f the fact s o f a case mu st be taken as true .
This, however, is like ly to be c hanged in a new UI law curre ntl y un der
considera ti on by the Congress.

Unemployment Insuran ce

The primary objective of the system was to protect individual workers against a loss of wages due
to adverse economic cond itions. Benefits were considered as earned by virtue of prior employment.
The program was aimed specifically at the unemployed regular, full-time worker. Other objectives
included stabilizing the economy by maintaining
purchasing power, encouraging employers to
stabilize their employment, and providing assi stance to workers in finding employment. These objectives remain the focus of the modern UI system .
Over the years, the procedures for determining
eligibility, benefit size, and benefit duration have
become increasingly comp lex and varied. Each
state now administers a variety of programs, but the
great majority of bene fits are paid under the reg ular
·tate program s. To be e li g ible for ben fits, a c la im ant must first have earned suffic ient wag credi ts
in covered e mpl yment as defined by the state .
State laws tend to include in their definition s of
covered employment at least those employers
specified by the Federal law . They may have broader or narrower coverage, but the narrower coverage
penalizes employers and offers no advantage to
the state.
An unemployed worker must register for a job
with the employment service and file an initial
claim for benefits . The date of filing establishes

both the wages which are examined to determine
his potential benefits as well as the period over
which he might be eligible to receive these benefits . However , eventual benefit receipt depends on
several factors. During each week of unemployment , a claimant must establish that he is available
for work , able to work, and actively seeking fulltime work.
Further, a claimant must be unemploy ed
through no fault of hi own. In Missouri and 18
other states, a claimant may be di sq ualified from
receiving benefits if it is established that he either
voluntarily left work without good cause attributable to his work or to hi s employer or was dismissed for misconduct related to hi s work. In ad dition , once une mployed, he may be disqualified
for refusing to a cept suitable work . Vari o us
penaltie - may be assigned depending on the offe nse. Either the c laimant or the former em ployer
may appeaJ an adverse determination.
The second part of this article , to appear in a
subsequent Monthly Review, will examine the variety of programs which exist among the states and
the special extended benefit and expanded coverage programs which are in effect during the
present recession . In addition, some major criticisms and problems of the UI system and some
proposed so lutions will also be studied .

Federal Reserve Bank of Kansas City

Full text of Economic Review (Federal Reserve Bank of Kansas City) : February 1976

FRASER