had a truly sensitive labor force series for the period before 1940. Indeed, to derive my aggregate employment series I estimated several hundred detailed employment series in order to reflect as best I could the true variability in that series, and thereby much of that in the unemployment series. And, though I made many checks to special censuses and city surveys, which did not disconfirm the unemployment figures, I emphasized the interpolations involved in the labor force series.6 We must recognize our ignorance, and the limitations of any data to portray those decades as lucidly as the powerful surveys of today permit. There is a clear alternative available to any model-maker who wants a different cyclical measure than that permitted by my labor force estimates. It is not to create a set of elasticities, assume them as constant, and infer that they permit us to test trend labor force participation rates. Nor is it to rely, half inadvertently, on series that appear more attractive because their derivation is less explicit. It is instead to include in the model specific additional measures. One obvious alternative is the standard Kuznet's income series (it being linked to different employment estimates than mine). The NBER cyclical indicators are another. Such cyclical measures can then be directly tested for their contribution to explain models of economic change during earlier decades, rather than through the screen of their contribution to shaping the measures against which we test models. 'Nor do I make the obvious point that linear interpolation between benchmark participation rates differential by age and sex permits interactions in the dynamic changes to net out. The result, however, would be inferior to that yielded by a perfectly specified model using superb and relevant data. (I omit reference to the various checks to benchmark figures made in my estimates for immigration, the impact of World War I on female participation rates etc.)

A NNUAL data on the labor force were not collected by the United States government before 1940. The decennial censuses prior to 1940 did include labor force enumerations, although the definitional basis of these figures was the concept rather than the labor force concept which underlies census data beginning in 1940.' Stanley Lebergott (1964) has undertaken the most careful and exhaustive adjustments of the gainful worker figures to make them consistent with the labor force concept and with the sampling procedures used by the Census Bureau in its Current Population Surveys which began in 1940. He has also constructed an annual labor force series for the 1900-1939 period which is consistent with his adjusted decennial census figures. One shortcoming of these annual labor force estimates is that they do not fully reflect the influence of economic variables on labor force participation. His procedure was basically to (1) obtain detailed labor force participation rates by age, sex, and in some cases, nativity, for decennial census years, (2 ) interpolate these rates linearly between census years, and (3) apply the interpolated rates to population data for the intercensoral years. As one might expect, the resulting labor force series displays virtually no cyclical variation, since annual changes in labor market conditions are not taken into account. Thus, Lebergott's annual estimates are not of the same character as the annual (or monthly) estimates prepared by the Census Bureau after 1940,2 and unemployment rates derived from them are not truly comparable with the official series for the post1940 years. Empirical studies of post-World War II data indicate that the size of the labor force in the short run depends in part on the degree of tightness in the job market.3 The search for

Robert M. Coen, Martin David, Session Topic: Tax Depreciation Reform: Discussion, The Journal of Finance, Vol. 27, No. 2, Papers and Proceedings of the Thirtieth Annual Meeting of the American Finance Association, New Orleans, Louisiana, December 27-29, 1971 (May, 1972), pp. 534-541

FIRMS determine their demands for factors of production by finding the combination of factor inputs that will maximize profits or minimize costs, subject to a technological constraint the production function. Because the production function is common to decisions for all factors, the factor demands must be interrelated; each factor demand function contains parameters from the underlying production function which also appear in other demand functions. Yet factor demand equations are commonly estimated independently, with the consequence that production function parameters implied by the different equation estimates may well be inconsistent. If the demand functions are to be included in a complete model of an economy, it is certainly desirable, if not essential, that they be consistent, i.e., that they imply a single set of parameters for the underlying production function. The authors are currently engaged in constructing a medium-term macro-model of the United States economy, an important subsector of which consists of aggregative labor and investment demand functions. This paper summarizes our efforts at estimating these two demand functions with data extending back to the early 1920's, treating relative prices and financial variables as exogenous. To illuminate the methodological issue just raised, we present results for three estimation procedures: (1) independent estimation of both relations, (2) a two-step approach in which production function parameters implied by independent estimates of one function are imposed in estimating the other relation, (3) joint estimation of both functions. By the nature of our approach, we obtain estimates of the production function from estimates of the factor demand relations. Indirect estimation of the production function in this way has also been suggested, though not carried out, by Dhrymes [7] and Nerlove [15]. It seems to us to be preferable to several alternatives. The production function is a constraint relating desired or expected (long-run equilibrium) output to desired (long-run equilibrium) factor inputs, and these are generally not observable variables. Expected output may be related to current and past levels of output, and observed factor inputs are likely to be disequilibrium values associated with lagged adjustment to desired levels. Use of actual current output and actual current inputs to estimate the production function directly is objectionable for these reasons. The frequent practice of correcting measured capital stock for its utilization (usually by assuming that capital is unemployed to the same extent as labor) recognizes that the observed capital stock is not the equilibrium quantity to which the production function refers, but it seems an inadequate way of accounting for expectations and adjustment lags in capital stock decisions. Also, if lagged adjustment characterizes the labor input so that labor, like capital, is a partially fixed factor, then labor input (employment) should also be corrected for utilization. The procyclical behavior of labor productivity suggests that this is the case. A second shortcoming of many direct estimates of the production function is that they ignore information contained in marginal productivity conditions. This information can usually be summarized in a so-called expansion path equation, i.e., an equation relating the ratio of desired factor inputs to the ratio of their prices. If the production function is estimated independently of the expansion path equation, the estimates will be statistically inconsistent. For this reason, among others, the expansion path is sometimes estimated first, and the information so obtained is then used in *This research was supported by National Science Foundation Grant No. GS1686. The authors wish to acknowledge the assistance of Richard Freeman, Margaret Simms, and Robert Willig on much of the computational work. A preliminary version of the paper was read at the Winter Meetings of the Econometric Society, December 28, 1968. We are indebted to Sherwin Rosen for his constructive suggestions, especially as concerns the clarification of our hypotheses on the adjustment process.

European unemployment rose sharply beginning in the mid-1970's and remains very high today, yet policymakers seem reluctant to pursue fiscal and monetary actions that would greatly stimulate aggregate demand. Traditional Keynesian policies may be impeded by a belief that rising unemployment is not so much Keynesian, arising from shortfalls in aggregate demand, as it is classical, originating from a failure of real wages to adjust to changing market conditions, particularly reduced rates of productivity growth. To determine the extent of classical vs. Keynesian unemployment, we apply a theoretical approach developed by Hickman (1987) to econometric models of labor supply and demand in selected European countries and the United States. The models are used to determine the time paths of the natural unemployment rate, potential output, and the full-employment real wage that clears the labor market at the natural rate of unemployment. The computed potential paths are benchmarks for measuring shortfalls of aggregate demand and excesses of actual over full-employment real wages. Effects of eliminating wage gaps are studied in counterfactual simulations, which provide information for decomposing unemployment into its natural, Keynesian, and classical components.