product quality and market efficiency: the effect of product recalls on resale prices and firm...

Product Quality and Market Efficiency: The Effect of Product Recalls on Resale Prices andFirm ValuationAuthor(s): Raymond S. HartmanSource: The Review of Economics and Statistics, Vol. 69, No. 2 (May, 1987), pp. 367-372Published by: The MIT PressStable URL: http://www.jstor.org/stable/1927247 .

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NOTES 367

Intriligator, Michael, "Disembodied and Embodied Technical Progress in the United States, 1929-58," this REVIEW 47 (Feb. 1965), 65-70.

Jorgenson, Dale, and Morton Sullivan, "Inflation and Corpo- rate Capital Recovery," in Charles Hulten (ed.), De- preciation, Inflation and the Taxation of Income from Capital (Washington, D.C.: Urban Institute, 1981).

Judge, G. W. Griffiths, R. Hill, and T. C. Lee, The Theory and Practice of Econometrics (New York: John Wiley, 1980).

McHugh, Richard, and Julia Lane, "The Embodiment Hy- pothesis: An Interregional Test," this REVIEW 65 (May 1983), 323-327.

McHugh, Richard, and R. Widdows, "The Age of Capital and State Unemployment Rates," Journal of Regional Sci- ence 24 (Aug. 1983), 85-92.

Uri, N., "The Impact of Technical Change on the Aggregate Production Function," Applied Economics 16 (Aug. 1984), 555-567.

U.S. Department of Labor, Bureau of Labor Statistics, Esti- mates of Capital Stock for Input-Output Industries (Washington, D.C., 1979).

You, Jong Keun, "Embodied and Disembodied Technical Pro- gress in the United States, 1929-1968," this REVIEW 58 (Feb. 1976), 123-127.

PRODUCT QUALITY AND MARKET EFFICIENCY: THE EFFECT OF PRODUCT RECALLS ON RESALE PRICES AND FIRM VALUATION

Raymond S. Hartman*

Abstract-Using the hedonic approach, this paper examines how well and how quickly the U.S. resale automobile market discounts new information on product quality, when that information comes in the form of product recalls which con- tradict prior quality information. The hedonic model is estimated for all 1980 domestic and imported automobiles sold in the resale market over 1981-1985. The specific new information analyzed is the safety recalls of several automobiles manufactured by General Motors-the X Cars. I find that the resale market efficiently discounted the new information signalled by the recalls of the X Cars.

Introduction

How well and how quickly do markets discount new information on product qui1ity which may conflict with prior information? And is such new information reflected in the asset value of the firms producing those products?

This first question has been explored tangentially by the hedonic literature, which measures how product prices reflect the attributes and qualities embodied in the products. The latter question has been addressed by Jarrell and Peltzman (1985), who examine the impact of recalls on the wealth of the sellers of the recalled products. This paper addresses the first question, while shedding light on the second, by measuring how resale markets discount the new information on product quality signalled by product recalls.

Product recalls signal unanticipated quality problems and produce a negative effect on a recalled product's resale value, if the implied problems may not or cannot be repaired during recall.' This effect should be more severe for recalls implying systemic or f ndamental quality problems. If the signal is interpreted to indicate manufacturer quality problems, the recall could nega- tively affect the market values of the firm's other products, new and used. The more pervasive the quality problems signalled, the greater will be the negative impact on the firm's asset value.

In order to quantify these effects, this paper applies the hedonic technique to all 1980-vintage domestic and foreign cars sold in the U.S. resale market during 1981-1985. I choose a single-vintage year in a post oil-embargo period, to focus on the market valuations attributable to recalls. The 1980-model year is particu- larly appropriate; it contains models for which safety recalls provided new information that seriously con- flicted with prior information. This model year includes the first offering of General Motors' X Cars,2 which were extensively promoted as high-quality, front-wheel drive, fuel-efficient, import-competitive cars. Contrary to this initial promotion, the X Cars suffered from serious defects in the new front-wheel design and were recalled several times over 1981-1985. Two brake- related recalls were the most serious.

Received for publication March 5, 1986. Revision accepted for publication August 5, 1986.

*Boston University and the Analysis Group, Inc. The author gratefully acknowledges the comments of Ernst

Berndt, Michael Doane, Michael Koehn and two anonymous referees, in addition to the research assistance of Ma. Cecilia Gonzalez, Sean Collins, and Jim Angel.

1 For example, some recalls are for inspection purposes; repair is not mandated if the problem is minor. Recalls requir- ing repair often cannot fully correct the problem if the defect is integrally embedded in the product design.

2 The Chevrolet Citation, Oldsmobile Omega, Pontiac Phoenix and Buick Skylark.

Copyright ? 1987



368 THE REVIEW OF ECONOMICS AND STATISTICS

In analyzing the 1980-vintage cars, I find that the resale market efficiently discounts new information signalled by recalls. Recalls diminish the resale value of the recalled product (an "own-product" effect) but do not affect the values of a manufacturer's other products ("cross-product" effects). The "own-product" effect varies for different classes of cars, types of defects (brake, engine and other) and severity of recall (major and minor). For the X Cars, the two brake-related recalls caused a 14% reduction in resale value, or a capital loss of $500-$800, depending upon the time of resale.

This paper proceeds as follows. Sections I and II describe the hedonic model and its estimation. Section III summarizes the results and addresses Jarrell and Peltzman's questions about the effect of recalls on the wealth of the sellers of the recalled products.

I. The Hedonic Model

The hedonic approach has been frequently used to analyze quality-adjusted price changes, with many examples focusing on the automobile market. Its strength is that it permits us to hold the market valuation of all other product attributes constant while measuring the independent effect of new information signalled by product recalls. In particular, adapting the notation of Ohta and Griliches (1975) to 1980-vintage cars,

log Pkit = BO + B1 * MK, + B2 * MDk 10

+ L B3S *AGEs + B4J * Akij s=2 j

+ B5J*Rjk. (1)

Pkit is the resale price in period t for a car of make i and model k; MKi and MDk are dummy variables indicating make and model. A GEs are dummy variables indicating the age3 of the car in t. Ak11 summarize the level of attribute j embodied in model k and make i. Rjk summarize the car's recall history, indicating cumulative recalls of type j for model k. The appendix describes all variables.

Without recalls (RJk = 0, all j and k), equation (1) is a standard hedonic specification. It indicates how an auto's attributes are valued in the resale market, including the auto's make (MK), model (MD) and physical depreciation (A GE). Existing studies support the use of physical attributes rather than subjectively-measured performance characteristics.4 Application to the resale market avoids the identification problem, allowing the

use of single-equation estimation techniques to recover demand valuations.5 Finally, the literature suggests the semi-log form.6

Returning to the market valuation of quality problems signalled by recalls, I use several recall measures. For the "own-product" effect, Rjk is defined to be the cumulative number of recalls of model k for the follow- ing j defects: Engine, Brakes, "Other" and Total. Using this definition, I examine whether the resale market provides different valuations for recalls concerning different defects. Rjk is also defined to be the cumulative number of recalls, of a particular severity. The categories of recall severity include:

Major Recall-more than 20% of the stock of model k recalled for defect j;

Medium Recall-10%-20% of the stock recalled; Minor Recall-less than 10% recalled.

Using this definition, I examine whether recalls have different effects depending upon the extent of the cars recalled.

For measuring the "cross-product" effects, I add a set of regressors, R_,O to equation (1), defined analogously to Rjk: RJO is the cumulative number of recalls for defect j for all other models o produced by the manufacturer of model k.

II. Results

Estimates of equation (1) on the subsample of non- recalled 1980-vintage cars,7 corroborated the hypothesis tests and price effects found in the literature (Ohta and Griliches (1975)) and the multicollinearity occurring upon inclusion of all or many attributes (AkiJ). To avoid this multicollinearity, which has made it difficult for other authors to recover the individual price effects of particular attributes, I will use two methods described below.

Tables 1 and 2 summarize the final results for the "own-product" effects. Table 1 uses the sample of all 1980-vintage cars, 190 domestic and imported makes/models. The regressors include age effects (AGE,), recall effects (R1,), several attributes and a set of "class" dummy variables introduced to eliminate the

A GE1 is included in the intercept. 4 Ohta and Griliches (1975) use physical attributes after

examining the two-stage hypothesis that physical attributes produce performance characteristics.

Because I analyze one vintage of cars, the usual time-series dummies estimating the quality-corrected price index are collinear with the age dummies and are excluded.

5 While simultaneity poses problems in recovering hedonic demand and supply parameters in new product markets (Rosen (1974)), the supply of the attributes embodied into used cars is almost perfectly inelastic with respect to price. The supply of the quantity of particular used cars (with different attributes) is not inelastic. If this latter simultaneity is important, different assumptions about the quantity of each make and model sold should generate different parameter estimates in (1). In the empirical analysis, the estimated resale market valuations were very robust to alternative sales assumptions. All automobile examples referenced use single equation techniques. Also, see Berndt (1983).

6 Cagan (1965) and Ohta and Griliches (1975, 1983). 7 Not reported here.



NOTES 369

TABLE 1.-RECALL EFFECTS FOR ALL 1980-VINTAGE CARS

Regression 1 Regression 2

Parameter Parameter Variable Estimate (t)a Estimate (t)a

Intercept 7.83 (145.4) 7.83 (144.3) Class Variables

Minicompact Regular (Ml) -0.238 (-7.89) -0.240 (-7.84) Subcompact Regular (Si) - 0.223 (-7.36) - 0.216 (-8.15) Subcompact Specialty (S2) -0.113 (-4.18) -0.163 (-6.48) Compact Regular (Cl) - 0.252 (- 10.85) - 0.252 (-10.89) Intermediate Regular (I1) -0.014 (-0.85) -0.013 (-0.73) Luxury Regular (Li) 0.684 (27.01) 0.637 (27.34) Luxury Specialty (L2) 0.596 (20.63) 0.596 (20.52) Station Wagon (WO) -0.082 (-3.79) - 0.099 (-5.22)

Age Variables 1.5 Years (A GE2) -0.045 (-1.89) -0.044 (-1.85) 2.0 Years (A GE3) -0.069 (-2.92) -0.072 (-2.99) 2.5 Years (AGE4) -0.149 (-6.30) -0.153 (-6.40) 3.0 Years (A GE5) -0.238 (-10.06) -0.243 (-10.18) 3.5 Years (A GE6) -0.328 (-13.81) -0.333 (-13.85) 4.0 Years (AGE7) -0.372 (-15.61) -0.378 (-15.65) 4.5 Years (AGE8) -0.442 (-18.49) -0.450 (-18.57) 5.0 Years (A GE9) -0.556 (-23.25) -0.564 (-23.25) 5.5 Years (A GE10) -0.695 (-28.96) -0.703 (-28.70)

Attributes Hatchback -0.215 (-10.83) -0.191 (-9.78) Weight -0.00018 (-10.84) -0.00017 (-10.4) Braking Horsepower 0.0038 (13.93) 0.0037 (13.68) Power Steering 0.082 (5.02) 0.078 (4.62) Air Conditioning 0.305 (13.78) 0.322 (14.62) Front Wheel Drive 0.128 (7.54) 0.114 (6.48)

Cumulative Recalls by Class Subcompact Regular (Si) - 0.023 (-1.45) Subcompact Specialty (S2) - 0.158 (- 7.08) Compact Regular (Cl) - 0.078 (-4.05) Luxury Regular (Li) -0.153 (-5.14) Station Wagon (WO) - 0.051 (-2.19)

Cumulative Recalls by Defect Brake Related -0.083 (-4.53) Engine Related -0.252 (- 5.40) Other -0.016 (-1.65)

R 2 .838 .834 F 290.0 305.0 Observations 1603 1603

at-statistics for Ho: B, = 0 in parentheses.

multicollinearity occurring when all attributes are included. To develop these class variables, I use Ward's Automotive Yearbook, which segments the market into "classes of cars" based on size and price. The class variables (MI, SI, S2, Ci, II, LI, L2 and WO-for definitions, see table 1) explain much of the variation in the attributes across classes,8 with remaining variation

explained by weight, braking horsepower, power steering and air conditioning.

Selectively examining the results in table 1, the coefficients for the age dummies are all negative, their magni- tude increasing with age (obsolescence). Because the coefficients of binary variables in the semi-log form approximate the percentage change in price due to that variable, the coefficients for AGE2 and AGE10 indicate that, ceteris paribus, resale prices of a 1.5 year old and a 5.5 year old car are approximately 4.5% and 70% below the resale price at 1 year of age. The coefficients for the two luxury classes suggest that they are valued 68% and

8 Using these class dummies, I can drop MK, MDk and many Aktj The remaining variables are quite significant. Two classes (statistically insignificant in initial regressions) are included in the intercept: intermediate specialty and standard full size.




TABLE 2.-RECALL EFFECTS FOR 1980 COMPACT REGULAR CLASS, INCLUDING X CARS

Regression 1 Regression 2 Regression 3

Parameter Parameter Parameter Variable Estimate (t)a Estimate (t)a Estimate (,)a

Intercept 7.62 (558.8) 7.62 (563.9) 7.63 (552.9) Principal Components

PRIN1 -0.044 (-26.9) -0.044 (-25.7) -0.045 (-26.5) PRIN2 -0.035 (-8.4) -0.039 (-8.4) -0.045 (-13.8) PRIN3 -0.064 (-19.2) -0.062 (-17.5) -0.062 (-19.2) PRIN4 -0.029 (-6.9) -0.029 (-6.8) -0.029 (-6.7) PRIN5 0.042 (6.8) 0.037 (5.7) 0.032 (5.9) PRIN6 -0.009 (-1.3) -0.011 (-1.4) -0.021 (-2.8) PRIN7 -0.095 (-9.3) -0.092 (-8.9) -0.104 (-9.7) PRIN8 -0.109 (-8.4) -0.112 (-8.6) -0.141 (-10.6) PRIN9 -0.057 (-3.0) -0.057 (-2.9) -0.060 (-3.1)

Age Variables 1.5 Years (A GE2) -0.095 (-4.9) -0.095 (-5.1) -0.099 (-5.2) 2.0 Years (A GE3) -0.087 (-4.4) -0.108 (-4.8) -0.128 (-6.7) 2.5 Years (A GE4) -0.185 (-9.3) -0.206 (-9.1) -0.225 (-11.8) 3.0 Years (A GE5) -0.328 (-16.5) -0.349 (-15.5) -0.328 (-12.9) 3.5 Years (AGE6) -0.422 (-19.1) -0.428 (-19.4) -0.434 (-17.3) 4.0 Years (AGE7) -0.466 (-21.1) -0.472 (-21.4) -0.489 (-19.4) 4.5 Years (A GE8) -0.549 (-24.9) -0.556 (-25.2) -0.566 (-22.3) 5.0 Years (A GE9) -0.695 (-31.5) -0.701 (-31.8) -0.700 (-27.5) 5.5 Years (A GE10) -0.842 (-38.2) -0.848 (-38.4) -0.841 (-33.1)

Cumulative Recalls Brakes -0.072 (-6.7) Brakes, Major -0.102 (-5.4) Brakes, Minor -0.031 (-1.3)

Cumulative Recalls by Age of Car 3.0 Years (A GE5) -0.074 (-2.5) 3.5 Years (A GE6) -0.061 (-4.0) 4.0 Years (AGE7) -0.051 (-3.6) 4.5 Years (AGE8) -0.054 (-3.6) 5.0 Years (A GE9) -0.065 (-4.4) 5.5 Years (A GE10) -0.070 (-4.6)

R 2 0.979 0.979 0.979 F 338.0 327.3 261.5 Observations 158 158 158

at-statistics for Ho: B, = 0 in parentheses.

59% more than an "average" used car and minicom- pacts 23% less.

Of primary interest are the effects of cumulative recalls. In column 1, those classes9 for which statistically significant recall effects were evident include subcompact regular (2.3% diminution in resale value due to a recall); subcompact specialty (15.8% diminution); compact regular, including the X Cars (7.8% diminution); and luxury regular and station wagons (15.3% and 5.1% reductions). Using the same sample, column 2 measures the market valuation of recalls for particular design defects. An average brake-related recall gener- ated an 8.27% diminution in resale price; an engine- related recall had a larger effect (25.2% reduction);

while "other" recalls had modest effects (1.6% reduction).

Table 1 tells a coherent story. We find that the resale market valuations of age, class of car and several attributes, for all 1980-vintage cars, are essentially the same in the two regressions. Furthermore, the market is quite sensitive to new quality information signalled by recalls. Column 1 indicates that, ceteris paribus, the average recall within the compact regular class caused a diminution in resale value of 7.8%. Since X Car brake recalls represented most of the recalls within this class, column 2 similarly indicates an average brake-related recall caused an 8.3% diminution in value.

Table 1 suggests statistically precise, negative resale- price effects due to recalls for classes of car and types of defect for the entire resale market. Since we are specifi- cally interested in the X Cars and their recalls, table 2

9 Regressors formed by interacting a car's cumulative recall variable with its class dummy.



NOTES 371

presents results for those cars most like the X Cars, except for the brake defect-i.e., the Ward's class con- taining the X Cars, the Compact Regular Class. This class includes 23 cars, with attributes more collinear than those in the full sample. Since I cannot use class dummies within a single class, I utilize principal components (PRIN,) to represent bundles of attributes. As a result, table 2 includes age and recall effects, and the effects of all other attributes as explained by their first nine principal components.10

Again, the valuation of age and all other attributes (the coefficients of PRINi) is fairly constant. Further- more, column 1 suggests that, ceteris paribus, the diminution in value per brake recall within the Compact Regular Class is 7.2%. Column 2 indicates the effects of major and minor brake recalls within the class are - 10.2% ankd - 3.1%. Since the X Cars were subject to one major and one minor brake recall, the results in column 2 suggest that they experienced a cumulative 13.3% diminution in value. Using the estimate for an "average" brake recall in column 1, the cumulative diminution is 14.4% (7.2%*2 "average" recalls). These estimates are statistically equivalent.

Column 3 allows the recall effect to vary over.time.11 The X Cars were introduced in Fall 1979, and the first brake recall occurred in Fall 1981. The results suggest that there were no significant recall effects (statistically insignificant parameter estimates) on resale price from Spring 1981 (AGE2) through Spring 1982 (AGE4). Starting in Fall 1982 (AGE,), resale prices reflected the defect and the effects are not statistically different through Spring 1985.

Table 2 corroborates table 1. The estimates of the diminution in the X Cars' resale value due to a brake- related recall are quite robust at 7%-8% and independent of the age of the car.

Finally, I do not report the regressions testing the "cross-product" effect of recalls. In all cases, these effects were not significantly different from zero, while all other regression parameters were quite similar to those in tables 1 and 2.

III. Summary and Conclusions

While appropriately valuing product age and attributes, the resale automobile market actively discounts new information signalled by safety recalls. The market differentiates recall signals among classes of cars, types of defects (brake, engine, and other) and severity of recalls (major and minor). These signals are product-

specific, with no evidence of cross-product effects. Fi- nally, the market responds fairly quickly to the new quality information; the first X Car recall (Fall 1981) affected the resale price by Fall 1982.

Using the results, a robust estimate of the effects of the two brake recalls on the resale value of the X Cars is a 14% diminution. Given their average original cost ($6000 ($1980)) and the age depreciation reflected in the tables, the average capital loss to the holder of an X Car due to brake defects was approximately $630 in the Fall of 1982.12

Finally, the observed loss in resale value may provide an answer to Jarrell and Peltzman. They state that "a loss of goodwill seems to be a large component of the total loss [in stock value due to a product recall]; ... [however], just what lies behind these goodwill losses remains something of a mystery (1985, p. 533)." For the X Cars, "what lies behind these goodwill losses" seems to be the quality problem signalled by the brake recalls, which was quickly and substantially discounted into resale prices. The consequential loss of stock value and goodwill reflects a resulting reduction in shareholder expectations about GM's future profitabil- ity. Such diminished expectations may reflect concerns about potentially significant legal costs and damage settlements, since the class of 1980 X Car owners num- bers about 1.5 million."3 The diminished expectations could also reflect stockholder concern about other GM products, new and used. However, we find that the resale auto market does not share this concern, since the cross-product recall effects are zero.

APPENDIX

The data contain information on all 1980-vintage cars, U.S. and foreign, including physical characteristics, new car prices, six years of biannual (April and October) used-car prices and mileage per gallon ratings. The resale prices are deflated to 1967. Eighteen physical characteristics were summarized, including length, width, number of doors and cylinders, weight,

10 See Theil (1971). 99.9% of the variation in the attributes is explained by nine principal components.

11 By interacting the cumulative brake recall variable with the age dummies.

12 If the resale market were completely efficient, this loss would approximate the cost of correcting the brake problems. This repair cost should rise with the age of the car; however, the estimated absolute diminution in value declines with age. Hence, it is difficult to relate the estimated resale loss to the cost of repair.

I think a better interpretation is that repair of the fundamen- tal brake-design problem during recall was not, and could not be, completely successful at any reasonable cost. As a result, the X Cars were perceived as lemons; this "lemonness" was a new attribute to be valued in the resale market. In this case, the new-car prices of the X Cars were too high, given their actual attributes. Once the actual attributes became known, the market reduced the "hedonic" prices of the X Cars to reflect all attributes, including their "lemonness."

13 Several complaints are pending.




braking horsepower, engine size, automatic transmission, front-wheel drive, power steering and air conditioning. Data sources are the National Automobile Dealer Association's Offi- cial Used Car Guide, New England edition and Environmental Protection Agency Reports.

The recall data come from Safety-Related Recall Campaigns for Motor Vehicles and Motor Vehicle Equipment, Including Tires, United States Department of Transportation, National Highway Traffic Safety Administration, 1975-1985. The specific variables are described in the text.

Dummy variables (based on size, price and marketing intent) for class of car were developed using Ward's A utomotive Yearbook. The Ward's categories are: Minicompact Regular, Minicompact Specialty, Subcompact Regular, Subcompact Specialty, Compact Regular, Compact Specialty, Intermediate Regular, Intermediate Specialty, Full-Size Standard, Full-Size Medium, Full-Size Medium Specialty, Luxury Regular, Luxury Specialty and Station Wagon.

A GE2-A GE10 summarize auto age. The 1980-vintage cars were introduced in Fall 1979. The sample follows their resale prices biannually, starting one year after introduction. Thus, AGE, = 1 (and AGEs = 0, s # 1) in t = 1 (Fall 1980) when the cars were 1 year old. AGE2 = 1 (and AGEs = 0 for s 0 2) in t = 2 (Spring 1981), when the cars are 1.5 years old;...; and A GE1O = 1 (AGEs = 0, s 0 10) in t = 10 (Spring 1985), when the cars are 5.5 years old.

Ordinary least squares and weighted least squares were used, with WLS weights similar to Ohta and Griliches (1975). The results were invariant to alternative weightings.

REFERENCES

Berndt, Ernst, " Quality Adjustment in Empirical Demand Analysis," M.I.T. Sloan School of Management, Work- ing Paper No. 1397-83 (1983).

Cagan, Phillip, "Measuring Quality Changes and the Purchas- ing Power of Money: An Exploratory Study of Automo- biles," in Zvi Griliches (ed.), Price Indexes and Quality Change (Cambridge: Harvard University Press, 1971), 215-256.

Griliches, Zvi (ed.), Price Indexes and Quality Change (Cam- bridge: Harvard University Press, 1971).

Jarrell, Gregg, and Sam Peltzman, "The Impact of Product Recalls on the Wealth of Sellers," Journal of Political Economy 93 (3) (1985).

Ohta, Makota, and Zvi Griliches, "Automobile Prices Re- visited: Extensions of the Hedonic Hypothesis," in Nes- ter Terleckyi (ed.), Household Production and Consump- tion (New York: Columbia University Press, 1975), 525-590. , "Automobile Prices and Quality: Did the Gasoline Price Increase Change Consumer Tastes in the U.S.," National Bureau of Economic Research Working Paper No. 1211 (1983).

Rosen, Sherwin, "Hedonic Prices and Implicit Markets: Prod- uct Differentiation in Pure Competition," Journal of Political Economy 82 (1) (1974), 34-55.

Theil, Henri, Principles of Econometrics (New York: John Wiley and Sons, 1971).

JOB TENURE AND CYCLICAL CHANGES IN THE LABOR MARKET*

Christopher J. Ruhm*

Abstract-Using data on male heads of households from the Michigan Panel Study of Income Dynamics, this paper finds that although short tenure workers accounted for a dispro- portionate share of total unemployment, during the early sev- enties, cyclical fluctuations in joblessness were concentrated among persons currently holding or recently having held longer-lasting employment. Greater unemployment durations were a more important source of rising joblessness than in- creased separation probabilities and cyclical changes in both variables were larger for recent leavers of medium or long tenure employment than for persons with similar seniority in their current job.

I. Introduction

Economists have long been interested in the distribu- tion of cyclical changes in employment and unemployment. For example, Clark and Summers (1981) argue

that employment fluctuations are disproportionately concentrated among teenagers and young women and that, contrary to some earlier studies (e.g., Feldstein (1973)), these groups receive substantial benefits from policies which increase aggregate demand.' Despite the important role of job seniority in most theories, limited empirical evidence has been obtained on tenure group variations in cyclical labor market flows.2

This paper provides information on two related questions. Section II examines how cyclical fluctuations in unemployment, among male heads of households, are distributed across workers with different employment durations. Section III decomposes the total effect into changes in job separation probabilities as compared to post-separation reductions in employment and evaluates the relative importance of each.

Received for publication July 26, 1985. Revision accepted for publication July 28, 1986.

*Boston University. I would like to thank George Akerlof, Lloyd Ulman, Robert

Solow, Lawrence Summers, Peter Doeringer, Thomas McGuire and two anonymous referees for helpful comments on earlier versions of this paper. I would also like to thank my parents for their trust and confidence.

1 For instance, teenagers and twenty to thirty-four year old females compose 9.2% and 15.5% of the population but 26.7% and 23.8% of cyclical employment fluctuations (Clark and Summers, 1981, p. 69).

2 See Raisian (1983) and Darby et al. (1985) for research which does consider seniority.

Copyright (? 1987



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