This paper presents a unified theory of human capital with both health capital and, what we term, skill capital endogenously determined within the model. By considering joint investment in health capital and in skill capital, the model highlights similarities and differences in these two important components of human capital. Health is distinct from skill: health is important to longevity, provides direct utility, provides time that can be devoted to work or other uses, is valued later in life, and eventually declines, no matter how much one invests in it (a dismal fact of life). Lifetime earnings are strongly multiplicative in skill and health, so that investment in skill capital raises the return to investment in health capital, and vice versa. The theory provides a conceptual framework for empirical and theoretical studies aimed at understanding the complex relationship between education and health, and generates several new testable predictions.
This paper series made possible by the RAND Center for the Study of Aging and the RAND Population Research Center.
This report is part of the RAND Corporation working paper series. RAND working papers are intended to share researchers' latest findings and to solicit informal peer review. They have been approved for circulation by RAND but may not have been formally edited or peer reviewed.
Permission is given to duplicate this electronic document for personal use only, as long as it is unaltered and complete. Copies may not be duplicated for commercial purposes. Unauthorized posting of RAND PDFs to a non-RAND Web site is prohibited. RAND PDFs are protected under copyright law. For information on reprint and linking permissions, please visit the RAND Permissions page.
The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.