Full text of New England Economic Review : September 1966

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NE\N ENGLAND

OTHER

SAVINGS

Where Did Those Savings Deposits Go?
Savings banks have been hit by depo it outflows in recent months. Rising rates of interest
paid by trong borrowers such as Government
and busine ses have attracted primarily large
rate -sensitive investment deposits.

INSTITUTIONS
Industrial Train ing
and the Business Cycle

BONDS

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Company training of workers tend to increase faster than overall employment during a
ew England manufacbusine expansion.
turers have recently been training more workers
for shorter periods to cope with their labor
supply problems.

----------------*

Where Did Those Savings
Deposits Go?

have been in the
news in recent months, which is surprising. They are noted as stable institutions,
mainly serving the small saver and home purchaser, and seldom involved in changes or
incidents which warrant special notice. But in
the current year, in the months of January,
April, and July, they suffered the greatest deposit withdrawals since banking crisis days.
UTUAL SAVINGS BANKS

Two developments have occurred which have
pushed savings banks into the limelight. First,
money has become the tightest it has been
since the 1920's, pushing interest rates up as
competition for loanable funds has increased.
Second, in recent years, many savings banks,
especially the larger ones, have started to compete for larger, "investment money" deposits

The New England Business Review is produced
in the Research Department. Paul S. Anderson
was primarily responsible for the article
"Where Did Those Savings Deposits Go?"
and Edwin F. Estle for "Industrial Training
and the Business Cycle."

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as contrasted with the traditional, small savings
deposits. These larger deposits are especially
vulnerable to shifting as interest rates rise.
T

•

,•

Savings banks were first organized m this
country 150 years ago to foster habits of thrift
among wage earners. They were concentrated
in the industrial Northeastern states and were
very successful in helping people accumulate
liquid savings. In 1900, for example, time and
savings deposits in New England averaged
close to $200 per capita as compared to about
$30 in the remainder of the Nation.
Savings banks, being nonprofit institutions,
were usually organized by wealthier professional people and businessmen of the community as a public service. Savings funds were
invested with the goal of safety rather than
yield. Although mortgage loans were made in
the early years with savings bank deposits, the
chief investment outlets were public and private
bonds and commercial bank stock. "Legal
Lists" of approved securities for savings banks
were issued by state authorities to insure
prudent investing.

September 1966
During the housing boom of the 1920's savings hanks invested more heavily in mortgage
loans so that by 1930 that ratio of such loans
to deposits in the Nation's mutual savings
hanks was just above 60 percent. In the succeeding depression and war, mortgage activity
declined. By 1945 the ratio of mortgage loans
to deposits was down below 30 percent.

,ir Cha
At the end of World War II, thrift institutions were in a rather peculiar situation.
Money was plentiful, interest rates were low,
and government bonds were the chief investment outlet. Even though savers could earn a
better rate by buying savings bonds than by
using thrift institutions, savings accounts grew
primarily because they were convenient.
As time went on, however, the postwar housing construction boom unfolded. Prospective
home buyers were anxious to borrow on mortgages, and rates on mortgages, while low, were
attractive compared to rates on government or
corporate bonds. Thrift institutions had a
great opportunity to use the abundant volume
of savings for the growing demand for mortgage
funds.
Savings and loan associations led the way in
attracting savings and lending them to home
buyers. They paid top rates for savings accounts and were fairly liberal on mortgage
lending terms. They grew very rapidly, averaging a growth rate of almost 15 percent per year
between 1946 and 1960.
Mutual savings hanks were more conservative and did not compete as aggressively for
savings. Their rates paid on savings were
generally a little below the rate paid by local
savings and loan associations and often ½ per-

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centage point or more below savings and loan
rates in western states. They did grow, however, hut at a much slower rate than savings
and loan associations, averaging an increase of
about 5 percent per year on deposits between
1946 and 1960. This did not even equal the
growth rate of gross national product, which
averaged 6 percent over this period.

hanC'

•

he Thrift Market

After 1960 a boom of unparalleled proportions began in all thrift institutions - savings
banks, savings and loan associations, and commercial hank savings departments. Consumers
more than doubled the amount of funds they
put each year into time and savings accounts
of these institutions from 1961 to 1965 as compared to the preceding 5 years. The surprising
feature about the expansion in this type of
savings is that overall consumer s"!-vings rose
very little over this period. The chief asset of
thrift institutions, mortgage loans, also expanded at a much faster rate after 1960 than
in the 1955-60 period. This mortgage loan
growth also had a surprising feature, namely
that the apparent need for such loans, as
measured by total residential construction expenditures, rose comparatively little.
Shown in the accompanying table are average
annual flows of funds to various uses which
demonstrate the shift in the character of the
thrift business after 1960. Flows of money into
time and savings deposits and ac<X\illlts expanded much faster than did growth in total
personal saving. This discrepancy was not explained by shifts of savings out of bonds and
stock, nor out of demand deposits. What
happened?
We cannot determine from aggregate funds

New England Business Review
why such flows occur or which flow causes other
flows. But such flows can give us some clues.
There is a suspicious association between the
unusually rapid growth of mortgages and the
increase in savings accounts which deserves close
scrutiny. From the accounting or balance sheet
viewpoint, growth in the liability side of the
balance sheet must, of course, be matched by
growth in assets and vice versa. But which
came first?
Theoretically, either the savings account
growth or the mortgage loan growth could have
been the basic cause and the other a result.
Funds could have started flowing into thrift
accounts first and then been used by financial
institutions for mortgages. Or the demand for

mortgages could have risen, leading the thrift
institutions to start working more aggressively
to get savings accounts. Probably the latter
explanation is the more reasonable; thrift institutions must have a profitable outlet for
funds before they actively seek them.
But a decision on which came first may not
be necessary; what is important is that the
mortgage loan growth could not have occurred
if thrift institutions had not been receiving the
additional funds. Furthermore, unless the additional funds were being generated from some
source, they could not have been available for
deposit into the thrift institutions. What might
be the source of the additional savings account
funds?

CHANGES IN SELECTED FUNDS FLOWS, 1956-60 to 1961-65
1956--60
1961-65
(Annual averages in $ billions)
Net flow of consumers funds to savings accounts

20
(6.1%)

23
(5.6%)

Total mortgage loan extensions (excluding refundings)

Residential construction expenditures

Consumer net investment in corporate and tax-exempt bonds

Consumer net investment in stocks . . . . . . . . . . . .

-1

Increases in consumer holdings of demand deposits and
currency . . . . . . . . . . . . . . . . . . . . . . . .

Personal saving . . . . . . . . . . . . . . . . . .
(ratio to disposable income) . . . . . . . . . .

Source: Federal Reserve Flow of Funds data. Total mortgage loan extensions estimated at net
increase in mortgage loans plus amount necessary to offset assumed 5 percent annual
regular repayment rate of outstandings (refinancing excluded).

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September 1966
New savings were not the source of these
savings account funds, as noted earlier. What
other sources might there be? A discussion of
the various possible origins of these additional
deposits would take us into an involved consideration of textbook theory of money flows,
but we can shortcircuit this by listing some
likely sources of new deposit funds: demand
deposits and currency, other thrift institutions,
the government or foreigners. Demand deposits and currency were not the source of the
new savings funds because consumer holdings
of these money categories also rose more from
1961- 65 than in 1956- 60, as shown in the table.
Other thrift institutions are ruled out as sources
because even if one gains funds at the expense
of another, this does not give a net increase
for all combined.
The government could indirectly supply the
additional deposits by running a budget surplus
and paying off its bonds. Then the paid-off
bond-holders could deposit their funds in savings banks. The shortcoming of this explanation is that neither Federal, state nor local
governments have been running surpluses in
recent years. Quite the reverse, they have been
net borrowers in substantial amounts. As for
foreigners, there is no evidence that foreign
consumers are placing any appreciable amount
of money into our thrift institutions.
Some other source of the additional savings
must be found. The most likely one seems to
be the thrift institutions themselves. What
must have been taking place is that the fonds
which thrift institutions lend to the public
through mortgages have been returning to the
thrift institutions to be relent again. There
must exist a special circular flow from thrift
institutions to borrowers who spend the money

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and the recipients redeposit it. The problem is
to determine what type of flow and expenditure
circle there can be so that the funds return to
thrift institutions rather than being spent for
goods or services. In the latter case the funds
would be in the general expenditure stream
rather than in our special "financial circle."
One way for keeping borrowed mortgage
funds in the fmancial, or investment sphere
rather than having them "leak out" into consumption of some sort is for the borrower to
use his mortgage loan proceeds for a fmancial
or investment use. Let us assume A gets a
mortgage to buy a used house from B, and B
uses the proceeds Lo buy stock or bonds from C.
What will C do with the money? As a general
rule, individuals do not sell stocks or bonds in
order to cover living expenses, so C is likely to
look around for another investment. He may
consider a savings account at 4 to 5½ percent
as a good investment for a time, or else he may
deposit the fonds in a savings account while
he waits for a good "deal" to turn up. The
net result is that B "disinvested" from a house,
the funds involved were acquired via a mortgage loan from a thrift institution, and eventually these funds wound up in a thrift institution
again. B could also have obtained a mortgage
loan directly and used the funds to buy stocks
or bonds from C. If C were to rebuy stocks
and bonds immediately from D, D might then
redeposit the funds.

Ir es
1

At some risk of over-simplification, we can
visualize two types of deposits and accounts at
thrift institutions. One is the traditional, small
savings account which is accumulated gradually
out of weekly or monthly income and eventually
is withdrawn for some consumption or ramy-

New England Business Review
day use. Such use returns the funds to the
income stream from which some other recipient
can, in turn, save a portion.
The other type of deposit is the investment,
or "hot" money, deposit, which arises from
transactions in the financial, or "portfolio management" sphere. Holders of investment deposits do not usually liquidate them for consumption purposes - they do not "spend capital" - so if they do use them, it is likely to he
for an investment purpose, like the purchase
of stocks and bonds. This keeps the investment
deposit in the investment sphere. If some
holder were to liquidate his investment deposit
for consumption purposes, the funds would
wind up in the income sphere.

An individual selling or mortgaging his home
in order, say, to buy stock with the proceeds
expects to profit from the transaction, of course.
He can probably get a lower rate on a mortgage
loan than in a straight personal loan. Furthermore, a stock collateral loan involves signing a
statement indicating the purpose of the loan
and some individuals may prefer not to declare
their intentions.
The postwar trend of stock prices probably
has led most prospective borrowers to believe
that a profit on a mortgage-to-stock transaction
was almost assured. Furthermore, the continual rise in the prices of most existing houses
makes both the savings hank and the borrower
feel quite secure in the safety of the mortgage.
Once an investment deposit is created by
the extension of a mortgage loan on an existing
home, it may he held in the form of a demand
deposit. But eviden.t ly it is usually redeposited
in a thrift institution.

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These "investment," "portfolio," or "hot"
money depositors differ from regular savers in
several ways. In addition to individuals, they
include a variety of organizations like churches,
charities, credit unions and trustees. The
amounts involved generally range from $5- 30
thousand although some savings hanks accept
even larger deposits. Regular savings deposits
average around $2,000 in size.

Regular savings accounts are accumulated by
regular, small deposits. Convenience and habit
play a big part as to where the regular saver
keeps his account. With investment money,
convenience and habit are much less important,
of course, since only one deposit of a large sum
is usually made. This leaves the interest rate
paid as the single most important factor in
attracting investment money.

If a savings hank decides to begin competing
for investment money, it must pay a fully competitive rate which means equalling the top
rates paid on savings deposits in the community. These rates must he brought to the
attention of investment money holders so financial newspapers and the fmancial pages of
"sophisticated" dailies are used in advertising.
By contrast, hanks will use radio and subway
advertising to attract regular savers and stress
convenience and friendliness.
Since investment deposits are generally large,
a savings hank can show rapid growth if it
can compete successfully for them. If it does
acquire investment deposits, its average deposit
size rises rapidly. Among New England savings
hanks, most of those that grew fastest in the
past 5 years also had the biggest increase in
average deposit size. Evidently they were able
to attract investment type of deposits.

September 1966

While total deposit levels at savings banks
have had a very steady growth trend, deposits
are continually being withdrawn. This is normal and reflects the fact that the first and still
primary purpose of these deposits is to serve
as rainy-day reserves. Year in and year out,
gross withdrawals average about 25 percent of
total deposits each year, or about 2 percent per
month. During interest payment months gross
withdrawals are ¼ to ½ percent larger and
during other months about ¼ percent less.
In most months the inflow of deposits exceeds
gross withdrawals so there is a net gain in the
level of total deposits amounting to ½ percent or so.
Because April is a month when both interest
payments are made and taxes are due, withdrawals are normally at their highest. April
1966 was worse than average, however, as the
following comparison shows:
Percent of total deposits

April 1966

April Average
1958- 65

Inflows
Withdrawals

2½
3¼

2½
2¾

Net

-¾

-¼

Inflows in April 1966 were about normal, but
withdrawals were about one-fifth greater than
usual.
We would naturally suspect that investment
deposits accounted for the greater April withdrawal rate. Several clues indicate that this
was indeed the case. First, the withdrawn
deposits were large because the average size of
savings deposit on the books of savings banks
declined as a result of the month's transactions.

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For reporting savings banks in New England,
the average deposit size declined slightly, by
$6, from $2,494 to $2,488. In the two preceding
Aprils, the average size had risen by $4 and $6.
Normally, interest credits serve to raise the
average deposit size by about $15 while partial
withdrawals for rainy day purposes reduce it.
The reason for the withdrawals should also
indicate the importance of investment deposits.
The Bowery Savings Bank of New York City
made a survey of all its April withdrawals
exceeding $500. The breakdown of the purposes was as follows:
1. Regular or normal withdrawals; total 46%
a. Income and other taxes. . . . . . 12 %
b. Home repair . . . . . . . . . . . . . . . 8
c. Vacation and travel. . . . . . . . . 4
d. Cars and major appliances. . . 3
e. Medical bills . . . . . . . . . . . . . . . 2
£. Other (Consumption, education,
own business, loans, gifts etc.) 17
2. Investment withdrawals, total
54%
a. Transfer to another mutual
thrift institution . . . . . . . . . . . 3%
b. Transfer to commercial bank
time account (includes CD's) 19
c. Purchase of government or
corporate bonds. . . . . . . . . . . . 9
d. Purchase of mutual fund shares 3
e. Purchase of capital stock .... 19
There may be some dispute about classifying
use of funds for own business as a regular use,
on the one hand, and mutual fund purchases as
an investment on the other. But neither of
these uses was sizable.
According to this breakdown, investment
accounted for fully half of the total. This seems

New England Business Review
a somewhat larger share than might have been
expected since total withdrawals in April were
only about a fifth larger than "normal." It
may be that some of the uses classified as investment are actually normal or regular, such as
stock and bond purchases. Some regular savers
may use savings banks to accumulate funds
for purchasing securities.
Because investment deposits are likely to be
withdrawn in large volume when there is an
interest rate advantage in doing so, the actual
magnitude of the withdrawals in April was not
surprisingly large. And the withdrawals in
July were even smaller. Evidently investment
deposits thus far have tended to be more stable
than might be expected.

Impact of Withdrawals
While withdrawals can cause discomfort to
those savings banks affected the most, the more
important question is how they affect the
economy in general. Regular, or rainy-day
withdrawals have no special impact because
they are handled in the normal course of even ts.
Regular withdrawals are more than offset by
regular deposits so all that happens is that a
small change takes place in the ownership of
these deposits.
Investment deposit withdrawals can be both
larger and more unexpected than regular withdrawals and therefore their impact could be
more severe. The actual effect of each investment withdrawal depends on what is done with
the proceeds.
These withdrawn funds might take several
routes. The simplest journey is a transfer from
one thrift institution to another. This has no
general impact on the economy - the losing

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thrift institution is simply a little smaller and
the gaining one a little larger.
The next simplest transaction for the withdrawn funds is for a stock or bond purchase
from another individual. What does the seller
do with the funds? What appears likely is that
the seller thought it was a good time to sell his
stocks or bonds and he decides to stay "on the
sidelines" awhile to see what develops. lie
will probably put the funds temporarily into a
liquid form, such as a savings deposit or account while he reconsiders the situation. For
some period of time, at least, deposit ownership
is simply transferred and has no impact on the
economy. Equally simple is the case where the
funds are used to buy a corporate bond from a
savings bank. Assets (bonds) and deposits
simply decline equally.
A more complicated situation anses if the
withdrawn funds are used to buy new stocks or
bonds. The corporation (or government) which
sells the stock or bond probably uses the funds
for construction or equipment, and thus the
funds end up in the general expenditure and income stream; that is, they no longer are investment funds. l'hese funds are lost from the
financial sphere and with investment deposits
down, the savings bank must cut back its
volume of assets.
The adjustment that is made probably proceeds as follows. In the first instance, the loss
of the deposit draws down the cash balances of
the savings bank, forcing the savings bank to
conserve its remaining balances. It slows down
on new mortgages until regular deposit inflows
build up its cash levels to a comfortable position
again. The net result of the entire operation
then is that a corporation gained funds for its

September 1966
investment purposes at the expense of some
prospective home or apartment house mortgagor.

If the withdrawn deposit was transferred to
a commercial bank time deposit of some sort,
the result will be much the same as the purchase
of a new stock or bond. Commercial banks
lend most of their funds to business borrowers,
so here again a deposit transfer from a savings
bank to a commercial bank channels money to
a business and away from a prospective
mortgagor.
Thus withdrawn investment deposits can
take two main avenues. They can be used for
other investment funds with a good chance of
returning to some savings bank. Or they can
leak out of the investment circuit and wind up
in the general flow of expenditures and income.
The first avenue leaves things pretty well unchanged, but the second allows businesses and
governments to get money at the expense of
the mortgage market.
Businesses and governments - especially
the Federal Government- are the strongest
borrowers in the credit markets so they will
always get the funds they want if they are willing to pay the interest cost. Even if investment deposits were not available to shift out of
savings banks, these borrowers could still get
the funds they really want through other avenues. They could make the interest rate so
attractive on their bonds that savings banks
would earn a better net rate on them than on
mortgages. (Mortgages require servicing at an
added cost of about ½ percent, while bonds
require no servicing.) Corporations and governments could also issue small size savingstype bonds directly to savers so that the savings
banks would be left out of the action entirely.

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It is more convenient and efficient for commercial banks to "collect" money for business
and government borrowers than for them to do
so directly, but if commercial banks were not
allowed to do so, specialized "business savings
and loan" institutions might well spring up
which would collect the funds.
The Future of Investment Deposits
The active or volatile deposits at savings
banks have been investment-money deposits.
Evidently an important source of these deposits
has been the issuance of mortgage loans by
thrift institutions on used houses. The redeposit of investment money in thrift institutions
has enabled them to make more existing home
mortgages, which create more investment deposits, and so forth.
Thus far in 1966, the mortgage and savings
climate has again shown a marked shift.
Growth in total savings deposits and shares
has declined sharply. This slowdown has not
been offset by faster growth of commercial
bank time deposits whose growth has declined
also. The total picture in all these types of
deposits and shares, as compared to a year ago,
can be seen in the following comparisons.
GROWTH I

TOTAL SAVI GS

A D TIME ACCOUNTS

First 7 Months ($Billions)

Savings banks ... ..... .
Savings and loans . ... . .
Commercial banks . . . . .

1966

1965

0.8
0.6
9.0

2.0
3.8
13.1

10.4

18.9

Total savings and time accounts thus far in
1966 have grown only about half as fast as a
year ago. This slowdown has occurred even
though the economy, as measurtd by gross
national product, is almost 8 percent larger, and

New England Business Review
the funds have been bid for much more
aggressively.
With the growth in savings accounts cut
back, extensions o.f mortgage loans have likewise been curtailed somewhat and the thrift
institutions indicate that in the future commitments will be cut back more sharply. If
this materializes, it may result in even further
declines in the growth of investment money
deposits.
As mortgage interest rates rise to nearrecord heights, those prospective mortgagors
that have the choice of postponing their mortgage financing will tend to do so. Such postponement is more likely to occur in the case
of mortgages on existing homes for investment
money purposes than on new home mortgages.
The supply of regular savings will be available
for new-home mortgages although competition
will continue even for these funds by government and corporate borrowing.
Interest rates on both corporate and government bonds have risen substantially in 1966,
attracting funds away from savings deposits
and accounts. This shift is shown clearly by
the flow of consumer funds in the first 2 quarters
of 1966 as compared to the quarterly average
for 1961-65, as follows:
Jan.-June Average

1966

1961-65

(Quarterly Average in$ Billions)

Net increase in savings
deposits and accounts
Net purchases of corporate and tax-exempt
bonds . . . . . . . . . . . . .
Net purchase of U.S.
Government bonds. .
Net purchase of corporate stock. . . . . . . . . .

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4.6

5.6

1.0

0.3

2.1

0.4

-0.3

Consumers purchased a quarterly average of
$3.5 net billion of bonds and stocks in the first
half of 1966 and deposited $4.6 billion in savings accounts. From 1961 to 1965 they had
bought a quarterly average of only 0.4 billion
net of bonds and stocks but deposited $5.6
billion in savings accounts.
The saver can profit by switching from savings accounts to bonds and back again at appropriate times. When interest rates are rising,
it is advantageous to sell bonds which are declining in price and place the funds in savings
accounts which retain a fixed value. When
interest rates are high and the possibility exists
that they might decline in the future, the
opposite shift is profitable since a capital gain
on bonds occurs when rates fall.
As an example, a saver holding $10,000 in
4½ percent high-grade corporate bonds could
have sold them at par in the first quarter of
1965. By switching to a savings bank deposit,
he would have lowered his earnings to about
4¼ percent. But in the first quarter of 1966
he could have bought bonds with a par value
of $11,000 with his $10,000 deposit. lf, in the
next several years, interest rates were to decline to their average 1961-65 level, he could sell
his $11,000 par value bonds for about $12,200.
In summary, the biggest impact on savings
banks in the current tight-money situation
stems from the aggressive borrowing demands
of corporations and governments. Investment
deposits of savings banks are more likely attracted to the corporate and government bond
market than small savings deposits. Such a loss
of deposits forces savings banks to halt their own
acquisition of assets, especially mortgage loans,
until the inflow ofregular savings funds as well
as repayments on outstanding mortgages helps
fill the void.

September 1966

Industrial Training
and the Business Cycle
training of workers
tends to increase at a faster rate than overall employment during a busjness expansion.
Because many skills are in short supply, firms
are faced with the need to train more workers
in a shorter time period. Some training occurs
in anticipation of further employment expansion; some in response to increased labor turnover, and some because of the introduction of
new technology.
OMPANY-SPONSORED

Training is undertaken by a company in
order to obtain workers with the necessary
skills for its production processes. Firms may
increase their training efforts even though the
overall employment level remains constant,
or even declines. The introduction of new
equipment into the firm may occasion training
courses for the existing work-force to introduce
t he new technique. Likewise, a rise in worker
turnover may require a firm to increase training
even though total employment remains unchanged. The firm may have to give orientation and on-the-job training to the new workers
replacing those leaving. Hence, changes in the
level of company-sponsored training need not
correspond with changes in the overall employ ment level.
A technical supplement to this article is available on request from the Bank's Research
Department.

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These conclusions are based on a comparison
of the levels of training and employment in
New England manufacturing in 1962 and 1965.
Last year New England manufacturers were
training 18 percent more of their workforce than
in 1962, yet total manufacturing employment
was up only 1 percent over this period. Not
only did manufacturers train more workers, but
they also shortened the duration of the training
period between 1962 and 1965. In order to
maintain their production schedules, New England manufacturers reduced the average length
of training courses by a fifth.
These findings were the results of a recent
survey by the Federal Reserve Bank of Boston
of 191 New England manufacturing firms which
had also participated in a Bank survey of
training practices in 1962.1 The firms were
selected to -represent the geographical, industrial, and size characteristics of all the region's
manufacturers.
The survey was designed to measure the
amount of training, both formal and informal,
that is financed, at least in part, by the firm
and that enhances the worker's ability to perform his job. lt covered four broad types of
training: orientation, apprenticeship, on-thejob training, and out-of-company training.
!"Industrial Investment in Manpower," New England Busine$S
Review, February, 1964.

New England Business Review
Extent of Training Activity

of tra1mng. Only one of these industries,
apparel, had a reduction in total employment
over the 1962-65 period.

One-fourth of the firms surveyed had no
training activity in both 1962 and 1965.
Another tenth of the sample had discontinued
their training programs during the period, while
an equal proportion had instituted training.

Also the emphasis in type of worker trained
over this period shifted somewhat. Training of
both production workers and managerialprofessional workers increased by a fifth. For
clerical workers, on the other hand, training
declined by a tenth, largely because of reduced
activity in the nondurable goods group of
industries. These industries reduced the orientation training of clerical workers by almost
half, as well as giving less training outside the
firm to this type of worker.

Of the firms conducting training, only onehalf showed a change in training corresponding
to the change in overall employment between
1962 and 1965.
Last year New England manufacturers were
giving training to 24 percent of their employees,
as compared to 20 percent in 1962. Over this
period the type of training carried on by the
region's manufacturers shifted considerably.
As the accompanying table indicates, training
on-the-job increased at about twice the rate of
all types of training. Out-of-company training,
on the other hand, declined by more than a
fourth over the period. Four industries fabricated metals, apparel, printing, and rubber
- reduced their training activities by a fifth
or more, generally with a reduction in all types

More than twice as many managerial and
professional workers received on-the-job training in 1965 than in 1962. Out-of-company
training of this class of worker, in contrast,
declined by an eighth over the period.

Duration of Training Programs
The average duration of training courses for
all types of training declined from 38 weeks in

AVERAGE DURATION OF TRAINING
Number of Weeks
Program
Orientation
On-the-job

Change in Duration, 1962-1965

1962

1965

Weeks

Percent

4.9

6.5

+ 1.6

+33

27.4

17.2

-10.2

-37

Apprenticeship

126.1

98.9

-27.2

-28

Out-of-company

34.8

23.1

-11.7

- 34

38.2

30.3

- 7.9

-21

All Programs

Source: Federal Reserve Bank of Boston Survey.

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September 1966
Causes of Increased Train· g
The increase in the number trained and the
change in the length of training programs stem
from a number of causes.

1962 to 30 weeks in 1965. Orientation training
was the only type of training in which the
duration of the course rose over the period,
increasing by l½ weeks. As the number of
experienced workers seeking jobs has declined
- national figures indicate that the unemployment rate for adult workers has reached quite
low levels - firms have had to hire those with
limited work experience. This type of worker
requires a more extensive period of orientation.
The duration of on-the-job and out-ofcompany training programs were each reduced
by a third, while the time of apprenticeship
training declined by a fifth. The average
apprenticeship course in 1962 ran for 2½
years, whereas in 1965 it lasted only 2 years.
Firms indicate that it is difficult to recruit
workers who must undergo long periods of
apprenticeship to attain a journeyman's status
and pay. Consequently, they have reduced the
training period, believing that workers can
become proficient in all but the most refined
techniques in a shorter time period.

New Technology
During the present economic expansion New
England manufacturers have increased their
output sharply without an appreciable increase
in employment. Over the 1961-65 period, that
is, since the start of the expansion, production
rose almost a fifth, while manufacturing employment increased less than 2 percent. Some
of this increase in output was obtained by increasing the length of the workweek for the
existing labor force. Average weekly hours of
production workers rose from 40 in 1961 to 41
in 1965. Another portion of the output increase
reflects an increase in productivity brought
about by a higher level of skills in the work
force as a result of education and training. Still
another factor adding to the productivity gain
is the use of improved capital equipment. The
Bank's surveys indicate that $3.4 billion has

TRAINING BY NEW ENGLAND MANUFACTURERS
Program

Number of Workers in Training

1962

Percent Change

(000)
1965

1962-1965

Orientation

140

154

+10

On-the-job

119

164

+38

Apprenticeship

+25

Out-of-company

-29

291

345

+18

Total

Source: Federal Reserve Bank of Boston Survey.

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New England Business Review
been invested in new plants and equipment in
New England during the current business rise.
Much of this spending replaced obsolete equipment with machines embodying new technology.
To make full use of this new equipment and
machinery, firms have had to provide training
for their workers. In the printing industry,
for example, periods of training of a week or
two are given journeymen to acquaint them
with newly introduced printing processes.

Labor Turnover
Although total employment, as already
noted, changed little over the 1962-65 period,
worker turnover increased markedly. As the
economy has expanded, New England manufacturers have reduced their layoffs of workers.
From 1962 to 1965 the layoff rate declined by a
fourth. However, with increased job opportunities available both within and outside of
manufacturing, employees have quit jobs at a
much faster rate. Quits were 17 per thousand
manufacturing employees in 1962, while last
year they were 21 per thousand workers. Consequently, manufacturers have had to seek
new employees in increasing numbers. The
rate of new hires advanced by a fourth from
1962 to 1965.
This turnover has necessitated an increase
in training, particularly orientation and on-thejob, to maintain production schedules. lt has
also given an impetus to shortening training
programs to better cope with labor shortages.
The problem of labor turnover is exemplified
by the response of one small firm in the survey.
Last year it was giving 15 weeks of on-the-job
training to three of its production workers. All

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three workers quit before the end of the
training period.

Employment Expansion
The increase in training from 1962 to 1965
may be in part a reflection of the employment
increase that occurred in New England last
year. Employment fell in 1963 and again in
1964 from the 1962 level. In 1965, however,
employment increased 3.5 percent over 1964's
level. This sharp increase may have induced
manufacturers to increase training programs
and to speed them up in the expectation that
expansion would continue, as indeed it has, with
employment so far this year up 5.5 percent
over the same months last year.
Training gives workers new resources but
some period of time is required before successful
accomplishment. Training raises a person's
future productivity. Therefore, some is carried on in anticipation of further output and
employment expansion. This is particularly
true of the longer training courses such as
those for apprenticeship and supervisorymanagement personnel.
Some of the respondents did indicate that
they had just recently introduced apprenticeship training, while others reported that they
were considering instituting training programs.
To explain more fully the relationship of
training to employment, further surveys will
be needed - perhaps on a continuing annual
basis. However, what the present survey indicates is that training and employment are
less firmly connected than might be supposed.
That is to say, company training is a continuing
process to meet a number of labor supply
problems.

September 1966

Here's New England MANUFACTURING INDEXES (seasonally adjusted)
1957-59
100

NEW ENGLAND
pJuly '66
June '66
July '65

UNITED STATES
July '66
June '66
July '65

All Manufacturing

149

147

133

160

159

146

Nonelectrical Machinery
Electrical Machinery
Transportation Equipment

168
175
192

162
173
176

147
147
144

184
188
165

180
186
167

162
159
150

Textiles, Apparel, Leather

116
118
116
114

115
116
116
115

109
110
116
102

144
145
n.a.
n.a.

144
144
152
114

135
134
144
108

141

139

130

156

154

142

Textiles
Apparel
Leather
Paper

Percent Change From:
BANKING AND CREDIT
Commercial and Industrial Loans($ millions)
(Weekly Reporting Member Banks)

Ju~'66
2,604

June'66
+ 3

Deposits ($ millions)
(Weekly Reporting Member Banks)

6,959

Check Payments($ millions)
(Selected Metropolitan Areas)*

234.9

Consumer Installment Credit Outstanding
(index, seas. adj. 1957-59 = 100)

174.1

DEPARTMENT STORE SALES
(index, seas. adj. 1957-59 = 100)

EMPLOYMENT, PRICES, MAN-HOURS
& EARNINGS
Nonagricultural Employment (thousands)

Insured Unemployment (thousands)
(excl. R.R. and temporary programs)
Consumer Prices
(index, 1957-59 = 100)
Production-Worker Man-Hours
(index, 1957- 59 = 100)
Weekly Earnings in Manufacturing($)

Ju~'65
+19

+
6

Percent Change From:
Ju~'66
58,717

180,227

+21

3,508.5

+
+

212.6

n.a.

4,230

+21

4
-21

115
(Mass.)

105.7
103.17
(Mass.)

132

June'66
+ 3

Ju~'65
+20

+
4

+16
+12

n.a.

64,293

944

+16

6
-18

113

+
+

116.4

111.38

+13
-17

4,919,627

-22

1,753,132

-11

- 1
+10

+10

+16

-12

+
+
+

6
4

OTHER INDICATORS

Total Construction Contract Awards** ( $ thous.)
Residential
Nonresidential
Public Works and Utilities
Electrical Energy Production (4 weeks
ending July 16, 1966)
(index, seas. adj. 1957-59 = 100)
Business Failures (number)

New Business Incorporations (number)
*Seasonally adjusted annual rates.
**3-mos. moving averages - May, June, July.

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290,942
93,244
126;105
71,593
171

63
996

+31

1,841,580

+26

+44

1,324,915

+11

187

+13

+58

p = preliminary

1,017
15,336

3
-14
+26

n.a. = not available

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Full text of New England Economic Review : September 1966

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