Working Paper: NBER ID: w1411
Authors: Harry J. Holzer
Abstract: 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.
Keywords: black youth unemployment; job search model; reservation wages; labor market behavior
JEL Codes: J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high reservation wages (J31) | employment probabilities (J68) |
| nonwage income (J31) | reservation wages (R21) |
| job offer arrival rates (J63) | reservation wages (R21) |
| reservation wages (R21) | unemployment spells (J64) |
| income-maximizing job search model assumptions (J64) | observed behaviors (C99) |
| high reservation wages (J31) | rational maximizing choices (D01) |