Are Unemployed Black Youth Income Maximizers?

The exceedingly high rates of unemployment which plague black youth today have generated a great deal of interest and concern among economists and policymakers. While recent research has provided some important insights into the nature and causes of the problem, many puzzles remain unresolved. For instance, the evidence seems to indicate that the problem of unemployment for black youth is primarily one of lengthy duration (or low probability of gaining employment), rather than one of high frequency (or high probability of losing employment). Furthermore, the reported reservation wages of black youth remain above the minimum wage despite these lengthy durations of unemployment; yet they continue to express desires for work and seek jobs which are comparable to those sought by white youth.' These findings raise several questions about the economic decisions made by young blacks. Do lengthy durations of joblessness reflect income or utility-maximizing behavior on the part of black youth who accurately perceive their market and nonmarket opportunities for income and who choose their responses accordingly? Are their perceptions of these market opportunities accurate-i.e., are expectations rational (or, at least, do they adapt after some period of search?) If so, is income being maximized? Or do other arguments in their utility functions, such as leisure, receive much weight? This paper presents the results of an exercise that sheds some light on these issues. In particular, I analyze some survey data on job search by inner-city black youth using a technique developed recently by Lancaster and Chesher [4]. They use a simple incomemaximizing model of job search to derive formulas for the elasticities of reservation wages and employment probabilities with respect to nonwage income and job offer arrival rates. These formulas enable us to compute these elasticities from summary statistics instead of estimating these parameters statistically. However, the technique is valid only if the stringent assumptions of the simple job search model are correct (and if certain survey data can be interpreted in a particular manner). The validity of an income-maximizing search model for a sample of unemployed black youth is tested below. Using formulas derived by Lancaster and Chesher, I compute the elasticities and employment probabilities for unemployed blacks that are implied by this model. These are then compared to observed employment probabilities and econometrically