Wisconsin Unemployment Insurance

United States 1932

Synopsis

A landmark in the development of American social insurance, the Wisconsin Unemployment Insurance Act of 1932 had roots in the social and political reform movements of the early twentieth century. Conceived and promoted by John R. Commons and his students at the University of Wisconsin, the law was an expression of their distinctive approach to labor legislation, which stressed the prevention of social ills such as unemployment through the creation of financial incentives, in this case for steady, full-time work. Their first campaigns, in 1921 and 1923, failed, ironically, because Wisconsin employers remained skeptical of their arguments. With the onset of the depression in 1930, Commons's students made their bill more conservative to blunt employer resistance and mobilized public interest in unemployment insurance as an antipoverty measure. The bill ultimately passed the legislature in early 1932 and went into effect in 1934. Its immediate effect was to make unemployment insurance politically acceptable and to popularize the idea of prevention, which was incorporated in much of the state legislation of the following years. The Wisconsin law thus demonstrated the impact of Commons and his followers on the movement for social insurance and economic security.

Timeline

• 1917: Russian revolutions.
• 1922: Inspired by the Bolsheviks' example of imposing revolution by means of a coup, Benito Mussolini leads his blackshirts in an October "March on Rome," and forms a new fascist government.
• 1927: Charles A. Lindbergh makes the first successful solo nonstop flight across the Atlantic and becomes an international hero.
• 1929: On "Black Friday" in October, prices on the U.S. stock market, which had been climbing wildly for several years, suddenly collapse. Thus begins the first phase of a world economic crisis and depression that will last until the beginning of World War II.
• 1932: When Ukrainians refuse to surrender their grain to his commissars, Stalin seals off supplies to the region, creating a manmade famine that will produce a greater death toll than the entirety of World War I.
• 1932: A "Bonus Army" of unemployed veterans marches on Washington, D.C. Many leave after Congress refuses their demands for payment of bonuses for wartime service, but others are forcibly removed by General Douglas MacArthur's troops. Also participating are two other figures destined to gain notoriety in the next world war: majors Dwight D. Eisenhower and George S. Patton.
• 1932: In German elections, Nazis gain a 37 percent plurality of Reichstag seats, raising tensions between the far right and the far left. On a "bloody Sunday" in July, Communists in Hamburg attack Nazis with guns, and a fierce battle ensues.
• 1932: Charles A. Lindbergh's baby son is kidnapped and killed, a crime for which Bruno Hauptmann will be charged in 1934, convicted in 1935, and executed in 1936.
• 1935: Second phase of New Deal begins with the introduction of social security, farm assistance, and housing and tax reform.
• 1937: Italy signs the Anti-Comintern Pact, signed by Germany and Japan the preceding year. Like the two others before it, Italy now withdraws from the League of Nations.
• 1942: Axis conquests reach their height in the middle of this year. The Nazis control a vast region from Normandy to the suburbs of Stalingrad, and from the Arctic Circle to the edges of the Sahara. To the east, the Japanese "Co-Prosperity Sphere" encompasses territories from China to Burma to the East Indies, stretching deep into the western Pacific.
• 1947: Establishment of the Marshall Plan to assist European nations in recovering from the war.

Event and Its Context

In 1932 Wisconsin became the first American state to adopt a system of unemployment insurance. The law was a response to the Great Depression and to the startling rise in unemployment. Its specific features, however, and the willingness of the legislature to consider it several years before unemployment insurance had gained support in other states reflected events in the reform community and in Wisconsin during the preceding decades. Thus, the 1932 law was the product of an extended effort to create a suitably American form of social insurance, together with the political opportunities created by the economic crisis of the early 1930s.

Until the twentieth century, unemployed workers were often viewed as unemployables, misfits, or unfortunates who could not or would not work in good times or bad. Charity, provided by private religious or philanthropic groups, was widely viewed as the appropriate response. The severe depression of the mid-1890s, and the lesser recessions of 1914-1915 and 1920-1922, however, demonstrated to all but the most heartless observers that able-bodied, hard-working individuals could lose jobs and face extreme hardship. Unemployment, then, could result from individual failure and deficiency but was more commonly a consequence of inadequate opportunity, especially in recession periods.

There were two responses. In most western European countries, governments introduced benefit programs to compensate unemployed workers for their losses. This approach proved to be expensive and in some cases self-defeating. Particularly in the chaotic aftermath of World War I, costs skyrocketed and a growing number of workers (at least to American observers) seemed content to accept their benefits and remain unemployed. Many Americans viewed the European programs as failures: they perpetuated the problem that they were supposed to solve and converted the able-bodied unemployed into unemployables. European experiences thus reinforced American doubts about the feasibility and value of social insurance.

The second response proved to be more fruitful. If unemployment (and certainly mass unemployment) was a sign of a broken economy, then the economy, rather than the individual victim, ought to command the attention of reformers and policymakers. By the mid-1910s, American reformers had devised a comprehensive plan for addressing such problems. The plan included four complementary measures. First were more numerous and efficient public employment offices, so unemployed workers could quickly learn what was available. Second was counter-cyclical public works planning designed to increase expenditures and create jobs in times of rising unemployment and then to reduce them in more prosperous periods. Third was employment regularization by private employers, who would be encouraged (perhaps with financial incentives) to plan their operations to avoid seasonal hiring and firing. The final measure was unemployment insurance to assist the residual group of unemployed workers—a residual that, if everything else worked, would only be a fraction of the usual total.

John R. Commons

The most important creator and promoter of these ideas was John R. Commons, a prominent economics professor at the University of Wisconsin. Commons was a historian and theoretician, a founder of the institutional school of economics, a critical figure in the development of labor legislation, and an enormously influential teacher whose students addressed practical problems as government administrators and reformers. A socialist in his earlier career, Commons had concluded by 1904, when he arrived at Wisconsin, that meaningful change was only possible within the established economic system. He set out to find conservative ways to bring about far-reaching reforms. One of his principal targets was unemployment.

Commons and other reformers established an advocacy organization, the American Association for Labor Legislation (AALL), in 1906. Two years later he installed a former student, John B. Andrews, as executive director. Under Andrews, the AALL became the single most influential force in promoting labor legislation and took the lead in publicizing the unemployment measures noted above. The Association's initial focus was workers compensation, the first widely adopted American social insurance program. Commons was deeply involved in the drafting and implementation of the early Wisconsin law (1909-1911) and became fascinated with one of its features, experience rating, which adjusted the employers' taxes to the volume of claims. By reducing claims through accident prevention, employers could reduce their taxes and presumably increase their profits. Accident prevention thus served the interests of workers and employers alike. Commons believed that the same idea could be applied to hazards such as unemployment. Preventing job losses would be more important than the actual benefits paid to unemployed workers. Writing about workers compensation in the 1910s, he argued that "insurance and compensation are secondary." The system "is much better described as a kind of social pressure brought to bear upon all employers in order to make them devote as much attention to the prevention of accidents . . . as they do to the manufacture and sale of their products." Substitute the word unemployment for accidents and this would be Commons's formula for unemployment insurance in the 1920s and 1930s.

The Wisconsin Bills

The first real opportunity to promote unemployment insurance came in 1920-1921 as cutbacks in government spending produced a severe recession and rising unemployment. With public concern growing and politicians eager to do something, Commons and Andrews seized the opportunity to promote unemployment insurance. Their efforts marked the beginning of a campaign that continued for a decade and made Wisconsin a pioneer. Although the AALL continued to agitate for the four programs and succeeded in enlisting wide support for public works planning and employment regularization, it had little success in promoting unemployment insurance except in Wisconsin.

Apart from Commons and his graduate students, the other critical reason for Wisconsin's role was the state's unorthodox labor movement. Although affiliated with the conservative American Federation of Labor (AFL), the Wisconsin State Federation of Labor reflected the influence of Milwaukee's powerful German socialist movement, which dominated the city's politics. Milwaukee socialists believed in activist government and a variety of worker-oriented benefit programs. At a time when most AFL leaders were becoming more conservative and distrustful of the state (opposing social insurance, for example, on the grounds that it undercut collective bargaining), Wisconsin unionists were enthusiastic proponents of a welfare state, even on a small scale. In their minds, collective bargaining and state programs such as Commons's unemployment insurance plan were complementary and mutually supporting.

In 1920 the state federation appointed a committee to work with Commons in drawing up an unemployment insurance bill. The unionists readily accepted Commons's emphasis on prevention and low benefit payments; their only objection was to a proposal for employee contributions, which Commons agreed to eliminate. The result was a business-friendly bill based on the workers compensation system that provided incentives for systematic operations and paid meager benefits ($l.50 per day for a maximum of 13 weeks). State senator Henry Huber, a leader of the legislature's progressive Republican faction, introduced the bill on 4 February 1921.

Commons spearheaded the campaign for support in nonlabor circles. With assistance from the AALL, he employed a graduate student to stump the state. He personally spoke to a variety of employer groups, denying that the bill had anything to do with "relief" or "socialistic agitation" and argued that only employers and businesses could prevent unemployment. Judicious revisions (reducing the benefit to $l.00 per day, for example) and the letters and petitions generated by this effort forced the state senate to consider the bill. When representatives of the leading employer groups strongly opposed it, senate conservatives united to defeat it by a narrow vote.

Commons and the union leaders mounted another campaign for unemployment insurance in 1923. They enlisted the groups that had backed them in 1921 and brought in leading employers who had embraced employment regularization to buttress their arguments that unemployment was preventable. Commons wrote that the Huber bill reflected a "business-like way" of dealing with unemployment and that the "business man is the dynamic factor. . . . He is the Captain of Industry." The "Captains of Industry," however, remained wary. The state manufacturers association agreed to support a legislative study if the reformers would drop the bill. At the last minute, however, the association reneged on the agreement and left Commons and his allies empty-handed.

After 1923 interest in unemployment insurance waned as prosperity reduced the number of unemployed and the severity of their distress. Commons's allies introduced versions of the Huber bill in 1925, 1927, and 1929, but they received little attention.

The Groves Bill

An alarming rise in layoffs and plant closings after 1929 (by some measures Wisconsin was the most severely affected of the Midwestern states) reawakened interest in unemployment and, in Wisconsin, the campaign for unemployment insurance. The political alignments of the 1920s remained largely unchanged, and a new group of activist students took on the mantle of the earlier reformers. Notable among them were Elizabeth Brandeis, daughter of Louis Brandeis, the famous jurist, and her husband, Paul Raushenbush. Brandeis and Raushenbush were influenced by the elder Brandeis's ideas about the strategic role of the business firm and were willing to go beyond Commons in making prevention the centerpiece of the new bill.

Brandeis, Rauschenbush, and Harold Groves, another former Commons student who had been elected to the legislature, devised a new bill during the summer of 1930. In an effort to lessen employer opposition, they scrapped the mutual insurance fund and experience rating—the prevention mechanism that Commons and Andrews had advocated—in favor of individual unemployment reserves. Under this plan, each employer would contribute to a state account that would pay benefits to that firm's employees. When the account reached $75 per worker, the contributions would cease. As workers drew on the account (the maximum benefit was $10 per week), the employer would resume contributions. The reserves were similar to the unemployment funds that a handful of companies had introduced in the 1920s as part of their regularization efforts. Their shortcomings were obvious: there was no sharing of risks and employees would be dependent on their employers. Groves introduced the new bill in February 1931.

The Groves bill generated new controversies. Employers continued to attack any compulsory plan, and John Andrews and Wisconsin's labor leaders were skeptical of the reserves plan. The state federation of labor broke with the academics and endorsed a new version of the Huber bill. This dissension allowed opponents to block any action during the regular legislative session. The reformers did persuade the legislature to authorize a study of the competing approaches, to be completed by November, when it would return for a special session.

During the summer Commons and his students launched a campaign to raise public awareness of unemployment insurance and pressure the legislature. Although the growing number of jobless workers made this assignment relatively easy, the severity of the depression also made it difficult to finance the campaign. Finally, Brandeis and Raushenbush decided that they personally would provide the money. They also agreed that the appeal would be for unemployment insurance and not for a specific measure.

These developments helped to bridge the differences in the reformers' ranks. Commons endorsed the reserves idea and Andrews agreed to cooperate. The union leaders also concluded that any system was better than none. In the meantime, the students mobilized a variety of interest groups, including the politically powerful farm organizations. By the fall of 1931, the employers were the only hold-outs.

In November, the legislature's study committee reported in favor of unemployment reserves—with the employer members vigorously dissenting—and set the stage for the dramatic special session. In response to employer objections that a voluntary effort would be preferable, the governor, a strong supporter, proposed and won approval of an amendment suspending the law if 200,000 workers were covered by voluntary plans by 1 June 1933, a concession that he viewed—correctly—as meaningless. The lower house then passed the Groves bill on 21 December. The senate was at first evenly divided, but public pressure persuaded several undecided senators to support the bill. The two houses reconciled minor differences and the Governor signed it on 28 February 1932.

The Wisconsin Act went into effect in 1934 (employers succeeded in delaying it for a year) with Paul Raushenbush as state administrator. Qualified workers began to receive benefits the following year. When President Roosevelt's Committee on Economic Security drafted a nationwide plan, which became the unemployment insurance section of the Social Security Act (1935), it included the reserves idea as an option for state consideration, but only one other state—Nebraska—adopted it. Whether the act actually prevented unemployment became a subject of extended controversy. After 1934 many Wisconsin employers supported the system, but mostly, it seemed, because it was less expensive than other approaches.

The Wisconsin Act was a significant departure for state government and a symbolically important step toward an American welfare state. It emphasized the continuity of the social reform impulse and the continuing appeal of unemployment prevention (via experience rating, rather than reserves), which was incorporated into most of the state legislation. In retrospect, it is clear that a nationwide system of unemployment insurance was no more inevitable in the 1930s than was a national health insurance system. Unemployment insurance became a reality when it did largely because a spirited group of Wisconsin activists, working in conjunction with the unorthodox state labor movement, kept the idea alive for more than a decade and responded to a changing political environment.

Key Players

Andrews, John B. (1880-1943): After receiving a Ph.D. from the University of Wisconsin (1908), Andrews became executive director of the new American Association for Labor Legislation and served in that position until his death. A prominent advocate of labor legislation, he was also the author of numerous books and articles (e.g., with Commons, Principles of Labor Legislation in 1916) on the subject.

Brandeis, Elizabeth (1896-1984): Daughter of U.S. Supreme Court Justice Louis Brandeis, Elizabeth Brandeis absorbed his ideas on the importance of small, competitive businesses. She studied under Commons at the University of Wisconsin, was co-author of the fourth volume of his famous History of Labour in the United States (1935), and taught at the University for the rest of her career. With husband Paul Raushenbush, she was a creator, promoter, and vigorous defender of the Wisconsin Act.

Commons, John R. (1862-1945): A central figure in the American progressive reform movement, Commons attended Johns Hopkins University as a graduate student in the late l880s but failed to receive a degree. After failing at several college teaching positions, he became a prominent investigator of societal problems and received an appointment at the University of Wisconsin in 1904. Working with his graduate students, he promoted labor reforms and social insurance and wrote History of Labour in the United States (1918-1935), his seminal work. Many of his students became activists and reformers.

See also: American Association for Labor Legislation; American Federation of Labor; Social Security Act.

Bibliography

Books

Berkowitz, Edward, and Kim McQuaid. Creating the WelfareState: The Political Economy of Twentieth Century Reform. Lawrence: University Press of Kansas, 1992.

Moss, David A. Socializing Security: Progressive EraEconomists and the Origins of American Social Policy.Cambridge: Harvard University Press, 1996.

Nelson, Daniel. Unemployment Insurance: The American Experience, 1915-1935. Madison: University of Wisconsin Press, 1969.

Patterson, James T. America's Struggle Against Poverty in the Twentieth Century. Cambridge: Harvard University Press, 2000.

—Daniel Nelson