Specification testing and nonparametric estimation of the human capital model

This chapter examines misspecification of conventional parametric human cap ital models of earnings and presents nonparametric estimates of the earning s function for both men and women. The chi-square tests reject the parametr ic functional forms widely used in empirical analysis. Parametric models gi ve very poor approximation to the true earnings function and their estimate s are quite sensitive to the specification of parametric functional form. P respecifying no functional forms, nonparametric models provide significantl y better fit than the parametric models, especially for women's earnings fu nction. Simple averages of earnings by age and education cells also provide a relatively poor model of earnings, since the averages are subject to sig nificant random fluctuations and have very high variances. Nonparametric re gression models improve on the within-cell averages by smoothing across cel ls.