Youth Unemployment in Ghana. Does Reservation Wage Matter?

Abstract

Unemployment is often cited as one of the macro-economic indicators measuring the strength and growth of an economy. Given that the youth are three times more likely to be unemployed, it is only prudent that in addressing issues of unemployment, programs, and policies are structured to address youth unemployment. In an attempt to better understand the dynamics of youth unemployment this study takes a brief look at the patterns of unemployment in Sub-Saharan Africa, particularly Ghana, to determine whether the reservation wage is a contributing factor to youth unemployment, its determinants and finally to answer the question of whether the youth are over-pricing themselves in the Ghanaian Labour Market. In determining whether the reservation wage is a contributing factor to youth unemployment in Ghana, we apply a probit regression estimation technique to explore how each of the reservation wages influences the probability of an individual becoming unemployed. Secondly to investigate the determinants of reservation wage among the youth in Ghana we employ an OLS regression model. Finally, in determining whether the youth are overpricing themselves in the Ghanaian labour market we use an independent sample t-test to test for significant difference between the mean of unemployed youth reservation wages and employed youth actual wages. Results from the study showed that the reservation wage is a determining factor of youth unemployment in Ghana and showed that youth with reservation wage have 26.8 percent chance of being unemployed. Also, unemployed youth, mean reservation wage was significantly lower than the mean actual wage at 5 percent level of significance indicating a lower price expectation to the actuals in the labour market.