On the Rationality of Black Youth Unemployment
NBER Working Paper No. 1411
In this paper I provide some evidence on the question of whether the behavior of unemployed young blacks, whose reservation wages are relatively high and whose jobless spells are very lengthy, reflect rational maximizing choices. To do this, I use a simple income-maximizing job search model to imply employment probabilities and various elasticities which are compared to those which are actually observed for young blacks.The results show that, for reasonable discount rates, the employment probabilities implied by income-maximization are consistent with those observed for young blacks. The elasticities of reservation wages with respect to nonwage income that are implied by income-maximizing are also consistent with those estimated econometrically for this group. This was true despite the many assumptions embodied in this model whose validity fora sample of low-income youth is highly questionable.The evidence thus suggests that young blacks are making economically rational choices by choosing high reservation wages and lengthy spells without jobs.
Published: Holzer, Harry J. "Are Unemployed Young Blacks Income-Maximizers?" Southern Economic Journal, Vol. 52, No. 1, pp. 777-784, January 1986.