T HERE has been much theoretical work done on models of information and search beginning with the work of Stigler (1961, 1962) but there has been little empirical investigation of the implications of these models. With the importance these models have attained in describing macroeconomic phenomena such as the Phillips curve, this empirical work is necessary to guide any potential methods designed to reduce the unemployment rate. This paper examines the time path of wage demands of the unemployed as a test of some of the implications of the search models. Most of the theoretical work has been devoted to analyzing the optimal behavior of individuals who must make choices on the basis of incomplete information and of the equilibrium behavior of markets whose participants behave according to particular search rules. For labor markets it follows that it is not necessarily optimal for an individual to accept the first job offered to him, and thus, the equilibrium position will be characterized by positive unemployment. The search strategy of an unemployed individual usually takes the following form. Search until a wage offer is received that is above some reservation wage, this reservation wage being determined by maximizing expected returns. Since search is a sequential process, the sequence of reservation wages completely describes the behavior of the agents.1 Furthermore, it is derived in most of the theoretical work that this sequence of reservation wages is either constant or monotonically declining. People who remain in the market are willing to accept successively lower wages as time passes.2 This seems to be a paradoxical result about learning, i.e., time always makes one pessimistic. The models in which this monotonicity property is generally derived, do not consider learning as part of the mechanism generating behavior, but for any consistent model of both search and turnover (implicit in the search theories of the Phillips curve) it is required that individuals revise upward their expectations of the wage distribution with the state of the economy. In an economy that is constantly changing, learning should be an important determinant of search. It is hypothesized that when one is permitted or required to learn about the wage distribution through sampling, it seems reasonable to expect that initially pessimistic individuals will revise their wage demands upward before sampling terminates. This paper will argue that the above hypothesis is correct and that the sequence of reservation wages is not monotonically declining. The first part of the paper will present a heuristic formulation of a search and learning model where it can be seen that the sequence of reservation wages depends on the initial expectations of an individual and on the particular sequence of information (including wage offers) that an individual obtains. Although the particular search rule analyzed is not derived from optimization, it should help develop the intuition necessary for believing that reservation wages can and do rise in the course of search. The formulation could be considered as the study of behavior characterized by bounded rationality, but it is mainly presented to motivate the empirical work. The empirical evidence presented supports the hypothesis that a monotonically declining sequence of reservation wages is not an accurate description of actual search behavior of unemployed individuals looking for jobs. The sequence of reservation wages depends heavily on the perceived and actual wage distribution.

T ESTED with regional data for the United States, the neoclassical growth model has yielded inconsistent results. Borts and Stein (1964, chapter 3) employed a simple growth model relating interregional factor movements to factor price differentials, but found little evidence of responsiveness. In a recent paper Smith (1973) found such a model consistent with the long-run factor mobility experience of states. Since a similar model was employed in both studies, the contrasting results may be ascribed to the use of inappropriate data in the test of the model of Borts and Stein, and/or inadequate model specification. They tested their model on the nonagricultural sector of each state, while Smith's model is tested on aggregate state data. Use of data on the nonagricultural sector of each state embodied the implicit assumption that capital and labor move only between states from one nonagricultural sector to another, and ignored the possibility of intersectoral factor movements. Smith avoided this potential problem by aggregating each state's output to a single sector. Thus, only interstate factor movements were relevant. In this paper, both intersectoral (within states) and interstate factor movements are considered. Factor movements affect the growth rate of a sector's capital-labor ratio, which determines the growth rate of the wage level.

where S2 is the usual unbiased estimator of (X2. This procedure in effect defines a new composite estimator which is a probabilistic mixture of bi and b1* and which has corresponding performance characteristics: its MSE is a weighted average (for given parameter values) of MSE bi and MSE bl*, the weights being given by the probabilities that inequality (13) will or will not be realized. We do not wish to suggest that time and effort be devoted to consideration of principal component estimators in every regression study. Benefits in terms of MSE reduction will often be nonexistent or outweighed by the additional computational costs. But in cases such that (i) data augmentation is impossible or very costly, (ii) multicollinearity is severe, and (iii) there exists a well-defined estimation objective, the principal component procedure appears to offer one route for improving upon conventional estimation techniques. FIGURE 1. BREAK-EVEN CORRELATION VALUES r 9

PURSUING the methods by which Leontief discovered his renowned paradox, previous empirical studies of the relationship among factors, production, and trade have computed the content of a single country's trade from the factor requirements of its production processes.' The present study introduces a somewhat different method. The assumption is made that all manufactured goods traded, not only by the United States but by other countries as well, are produced with a single set of technical coefficients, namely the combinations of labor skills observed in each industry in the United States. It is postulated that the availability of labor skills determines patterns of international location and trade for a broad group of manufactured products, those not closely tied to natural resources. It is further supposed that the relationship between trade and skills for these goods will reveal itself in American skill requirements for reproducing trade flows. The first expectation seems plausible. Direct capital requirements are not as high in manufacturing as in most other activities.2 Labor appears to be less mobile internationally than liquid capital or capital goods. Generations of industrial experience and education may be required to build a skilled labor force. Let me spell out the basic method before examining its rationale. As in Leontief's computations, production functions are assumed to involve simple linear combinations of factors. There are no scale effects, and factors are perfectly divisible. We define Si as a quantity of the ith factor, such as labor of a specified skill class; Xj is the quantity of the jth product traded, so that XI, X2, X3, . . . , Xm describes the composition of a trade flow such as Japanese exports.3 To determine the skills required to produce this trade flow with American coefficients, we multiply our m-item trade vector X by an m X n matrix A, in which the elements aij (i= 1, 2, . . . n; j=1, 2,... m) represent average United States direct requirements for labor of n skill classes to produce a unit of output of each product. The result, the vector SI, S2, S3, . . . , SX, shows United States skill requirements for producing the goods in the trade flow.

PROFESSORS Friedman and Meiselman' recently have reported that a simple theory model describes aggregate consumption more accurately than a simple autonomous expenditure model. They believe this result is evidence that the quantity theory is a better description of the American economy than the autonomous expenditure or Keynesian theory.2 If their interpretation were correct, the Friedman-Meiselman paper would be one of the most significant economic studies in many years. But it is not correct. Friedman and Meiselman have represented the autonomous expenditure theory in a very unorthodox form. Their statistical comparisons are extremely sensitive to how the autonomous expenditure theory is represented. Below, I employ a more conventional representation of the autonomous expenditure theory and demonstrate why Friedman and Meiselman's tests are misleading. Further, using this conventional model and some of their data, little empirical evidence is found which favors the theory. Finally some other conceptual weaknesses of the Friedman-Meiselman tests are illustrated. Briefly, Friedman and Meiselman compare simple, partial, and multiple correlation coefficients obtained from the following equations, estimated from annual (1897-1958) and quarterly (1945-1958) data for the United States: C=al+8(A (1) C=a2 +82M (2) C = a3+/33A +13P (3) C = a4 +84M+y4P (4) C = a5 + 35A + 85M (5) C = a6 + 86A + 86M + Y6P (6)

D ESPITE the growth in importance of other financial institutions the behavior of the commercial banking system remains a principal consideration in most discussions of national monetary affairs. Explanations of the way in which the Federal Reserve System exerts its influence on the cost and availability of credit in the economy continue to rely heavily on hypotheses about the loan and investment policy of the commercial banking system. For example, the postwar doctrine of credit rationing appears to rest primarily on the observed behavior of commercial bankers in dealing with their loan customers. Less exclusively but still significantly, the effectiveness of debt management and Federal Reserve open market operations in influencing the terms of credit to private borrowers has been linked to the responsiveness of commercial bankers to changes in market prices and yields of government securities. concept of the commercial bank which undergirds the argument for the sensitivity of commercial bankers to yield differentials is basically similar to that of an individual investor concerned with the yield, risk, and liquidity of alternative financial instruments. By an appropriate development of risk considerations' and by (rather general) allusion to oligopolistic imperfections of competition within the banking industry,2 this model has been extended to cover the rationing of bank credit by nonprice means. Nevertheless, the state of our understanding of commercial bank behavior is not entirely satisfactory. If commercial bankers are sensitive to yield changes on government securities why have they moved so freely out of these securities whenever the demand for bank loans was strong? 3 If oligopolistic conditions within the banking industry occasion nonprice rationing of bank credit what is their specific nature and how do they exert their influence? purpose of this article is to contribute to our understanding of commercial bank behavior by examining some implications for bankers of the demand deposit relationship of their loan customers. Anyone who troubles to inquire of commercial bankers will discover that the deposit relationship of a loan customer is a primary consideration in determining the cost and availability of bank credit to that customer. Despite this fact, the literature of monetary economics has little or nothing to say about the deposit relationship as one of the determinants of the investment behavior of commercial banks. Rather, as I have mentioned, we have preferred to carry forward the discussion in terms of the broader analytical categories of yield, risk, and liquidity applicable to any investor. But a discussion of commercial banks which is couched in these more general terms abstracts from some of the essential features of commercial banks as specialized financial institutions. In particular it neglects the role of deposits as the principal source of an individual bank's power to lend and invest. In what follows we shall examine the significance of the deposit relationship for the individual bank and then explore its influence on such broader issues as the cost and availability of bank cred* This article is drawn from a more comprehensive study of commercial bank loan and investment policy supported by Merrill Foundation for the Advancement of Financial Knowledge, Inc. author wishes to acknowledge the helpful criticism of Professors James Duesenberry, John Lintner, Lawrence Thompson, and Dr. Parker Willis. 1 For examples see Ira 0. Scott, The Availability Doctrine: Theoretical Underpinnings, Review of Economic Studies, xxv (October I957); and my own Risk and Credit Quarterly Journal of Economics, LXXIV (May I960). 2 For examples see John H. Kareken, Lenders' Preferences, Credit Rationing, and the Effectiveness of Monetary Policy, this REVIEW, xxxix (August I957); Monetary Policy and Management of the Public Debt, Joint Committee on the Economic Report, 82d Congress, 2d Session, Statement of Paul Samuelson; and Warren L. Smith, On the Effectiveness of Monetary Policy, American Economic Review, XLVI (September I956), esp. 593-96. 'This movement is chronicled and discussed in John H. Kareken, Post-Accord Monetary Developments in the United States, Banca Nazionale del Lavoro (Rome), Quarterly Review, September I956, 588-607; and Warren L. Smith, op. cit., esp. 597.

If monetary policy works exclusively through the cost of borrowing and many borrowers are insensitive to higher rates of interest, how is a debacle in the government securities market to be avoided in the process of restraining a boom? This problem had its genesis in the union of the Keynesian stress on the interest rate as the sole channel for monetary policy with the phenomenon of the apparent indifference of business borrowers to interest charges reported in the Oxford surveys of 1938 and I940. The growth of government debt during the war, followed by strong inflationary pressures, has made this the central issue for postwar monetary policy. While the monetary authorities have been feeling their way gingerly forward on the practical level, the availability doctrine has been evolving to rationalize their experience (and perhaps hopes) on the theoretical level. It is important to realize that the dilemma which the availability doctrine seeks to solve arises because the relative insensitivity of borrowers to rate increases on private securities is assumed to extend above pursuit levels available to government yields as limited by considerations of government debt policy. Presumably no one denies the power of the monetary authority to check an inflationary boom if it wishes to force the general level of interest rates high enough. But can monetary policy be made effective without raising yields on government securities to levels which are excessive in terms of the burden of interest charges on the national debt and of reasonable stability in the market for government securities? It is within this more restricted elbow room left to monetary policy by the assumptions of inelastic demand from private borrowers and ceiling yields on government securities that the availability doctrine advances its solution. It is not surprising, therefore, that the availability doctrine should stress lenders' behavior on the one hand and variables other than the interest rate on the other. The availability doctrine or, more broadly, the new theory of credit is subjected to a trenchant restatement and critique in formal terms by Professor John H. Kareken in the August I957 issue of this REvIEW.1 Kareken finds small comfort for monetary policy in the availability doctrine. If credit rationing is absent and the doctrine strictly interpreted, monetary policy will be either ineffective or too effective, depending on the interest elasticity of lenders' supply in the private market (assuming quite inelastic demand). On the other hand, if lenders do ration credit, the availability doctrine suffers from internal inconsistencies and requires modifications in ways which Kareken is unwilling or unable to suggest. In either instance little encouragement is offered to monetary policy. My purpose is to defend the availability doctrine against these views and to argue for the effectiveness of monetary policy. To contribute to the control of inflation, monetary policy must be able to restrict the flow of funds to private borrowers. Whether borrowers are deterred from borrowing by the high interest costs incurred or fail to receive accommodation from lenders at any interest rate because of non-price rationing is a matter of indifference to monetary policy so long as the desired restraint is effective. It is a matter of indifference, that is, unless important side effects attend either the price or nonprice rationing of funds. The availability doctrine has been fashioned to meet a specific objection to the use of rate increases to restrain borrowing,

THE rate of economic development of the Soviet Union is a subject of considerable interest to western economists. To date, the most important single measure of this development has been the official Russian index of the physical volume of production of Russian industry published in various Soviet sources for the I920's and I930's. In the past few years, there have been several articles by western economists devoted to a discussion of the defects of this index.2 The main criticisms are these. First, the index represents gross value of industrial output rather than value-added. Second, the index is subject to an inflationary bias on two main counts: (i) prices of the baseweight year I926-27 were unduly high for many newly produced industrial goods which continued to be valued at these inflated prices even after more efficient production methods ha:d brought their prices more in line with the overall price structure of the economy; had a later year been used as a base-weight year the resulting index would have revealed a smaller rise than the existing index does; (2) the so-called constant prices of I926-27 include an increasing number of prices for later years so that, under conditions of rising prices, an artificial inflation of the index results. Soviet economic authorities themselves have long voiced dissatisfaction with the official index expressed in prices of I926-27, and in I948 it was decided to abandon the I926-27 based index in favor of an index expressed in current wholesale prices and corrected for price changes by means of a wholesale price index.3 It is not known whether the new method is in actual use, whether the old official index will be recalculated by the new method or, if this is done, whether the results will be made public. Despite these reasons for dissatisfaction with the old official index, western economists have made no attempt to date to construct independently a more satisfactory index of Soviet industrial output.4 Although Societ statistical sources contain an adequate number of series for output in physical units (i.e., tons, square meters, etc.), a means for combining these in a single index of industrial output has been lacking. This is due to the deliberate suppression by Soviet authorities of the necessary price data. No systematic presentation of price data has been made for any year, and such scattered prices as are available are largely for years prior to I930. No price index has been published for the years after I93I. Value of output is never expressed in the prices of the current year but always in the so-called constant prices of I926-

TWO surveys of the operating expenses of Canadian manufacturers have been made in the last twenty-five years. The fLrst covers all establishments reporting to the Dominion Bureau of Statistics for the Census of Manufactures in each of the five years I9I 7 to 192 I; the second, undertaken for the Royal Commission on Dominion-Provincial Relations in I938, covers in greater detail a limited but fairly representative group of manufacturers for each of the years I929, I933, and I936. The present paper describes the origin, methods, and results of the second or I938 survey, and provides a summary of the I9I7-2I study. In addition, it attempts to arrange the results of both surveys in comparable form.' Because of the difficulty of securing reliable figures by the method employed in the I938 survey, special attention is given to the representativeness of the results. Certain details of importance for the text will be found in appendices. Among the tables presented, Table 9 is of most general interest, while certain applications of the results will be found in Tables io and i i.