Human Capital Dynamics across Provinces in China: A Spatial Markov Chain Approach

Human capital is an essential driver of the economy. The regional distribution of human capital affects the development process of the economy. This paper applies the Markov chain and its spatial form extensions to the human capital index of China from 1985 to 2019 and calculates the transition probabilities between different human capital levels. This paper shows that China’s regional human capital is unevenly distributed, with significant differences across provinces, and this difference does not tend to decrease over time. Furthermore, by comparing the results of non-spatial and spatial Markov chains, this study confirms the spatial effects from neighboring regions on human capital changes. In other words, rich neighboring provinces increase the probability that a province becomes better off, and conversely, a province surrounded by poor neighboring provinces has a higher probability to worsen. This article emphasizes the importance of incorporating spatial effects into regional human capital in China.