Addressing skills mismatch and informal employment in Azerbaijan Aimee Hampel-Milagrosa 1 and Jasmin Sibal 2 In the aftermath of the oil price shock of 2014, Azerbaijan launched an ambitious reform agenda that embedded the critical role of human capital in increased labor productivity, higher competitive capacity and sustainable economic growth. While this new reform strategy reinforces and expands the numerous education-system reforms implemented in the country since it gained independence in 1991, many challenges remain. Azerbaijan is among the lowest in Eastern Europe and Central Asia in terms of government spending on education, quality of secondary and vocational education and training, and enrolment in primary and tertiary education. The country also suffers from a pronounced skills mismatch and high levels of informal employment. This paper presents the most recent and comprehensive demographic trends and labor market assessment for Azerbaijan. Using national data, it traces origins of the skills gap, reviews the challenges in skills development and discusses early gains in the latest education reform agenda. The paper ends with recommendations that would strengthen the institutional set-up for education and skills development, including specific policy areas where Azerbaijan education policy could be refined. JEL codes: E24, J21, J24, J46, 3.1 Demographic Trends and Labor Market Assessment Azerbaijan’s 2016 Strategic Road Maps on the National Economy Perspective and Main Sectors of the Economy recognize that human capital plays a key role in increasing labour productivity, sustainable economic growth, higher competitive capacity in manufacturing and services, and the country’s integration into global markets. Numerous education-system reforms have been undertaken since the country’s independence in 1991. An important gain from these reforms has been increased participation in primary and secondary education, especially since 2000. Despite this progress, challenges remain. These include low government spending on education, the poor quality of secondary and technical vocational education, low enrolment in tertiary education, and not enough skilled workers. The following sections describe the demographic trends and provide an assessment of the labour market of Azerbaijan. Demographic structure Azerbaijan’s population of 9.9 million is estimated to increase to 10.7 million by 2030 (Figure 1). The country has a low-age dependency ratio, with 22.6% of the population below 15 years and 6.6% above 65. Some 71% of the population is within the 15–64 working-age range—a share that is estimated to remain at that level until at least 2040. In 2018, young people (25 or below) constituted two-fifths of the population, and that proportion is projected to grow in the coming years, posing a challenge to the government for job creation. With the population growing at an average rate of 1.2% a year, about 100,000 new jobs have to be created every year. 1 Economist, Economic Research and Regional Cooperation Department, Asian Development Bank 2 Economics Officer, Economic Research and Regional Cooperation Department, Asian Development Bank Figure 1: Population Composition and Dependency Ratio, 1990–2030 14 70 12 60 10 50 8 40 6 30 Percent 4 20 Population(million) 2 10 0 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 0-14 15-64 65+ Dependency ratio (right-hand scale) Notes: 1990–2010 population based on estimates, 2020–2030 based on medium variant projections as of July 1 of the year. Dependency ratio is the ratio of dependents—people younger than 15 years and older than 64—to the working-age population. Source: United Nations. 2017. World Population Prospects: The 2017 Revision . New York. Migration is affecting Azerbaijan’s demographic profile and economic performance in two ways: through a brain drain when skilled workers leave, and through human capital enrichment when skilled workers return and are reintegrated into the labor market after gaining work experience or training abroad. UNDESA (2016) estimates the number of Azerbaijani emigrants at 1.15 million–1.28 million, about 14% of the population. Because there is no official registration system for labor migrants, information on their profiles is limited. But based on available data, a large majority live in other Commonwealth of Independent States, especially the Russian Federation, Kazakhstan, and Ukraine—and to a far lesser extent in Germany, Turkey, Israel, and the United States. Azerbaijan’s labor migrants are predominantly male, ages 25–44, from rural areas, and working in crafts and professional services (ADB 2019a). Unemployment and low wages are the main factors for the high number of migrants moving to neighboring countries (Allahveranov and Huseynov 2013). Migration affects local labor markets by its effect on the size and quality of a country’s economically active population. Because of limited employment opportunities in Azerbaijan, migration has somewhat eased pressure on the country’s labor market by absorbing the excess supply of labor. When the oil sector was booming, the country attracted inflows of foreign workers from neighboring countries. Most foreign labor migrants are men, with women comprising only 10% (State Statistical Committee 2018a). Most foreign labor migrants are between 30 and 59 years old and employed as skilled workers in the oil and construction industries. In 2010, the government introduced quotas on foreign labor migration, putting a cap at 12,000 in 2013 and 2014 (Ministry of Labor and Social Protection of the Population 2017). The quota was lowered in 2015 in response to low labor demand during the economic slowdown. While the number of foreign labor migrants is regulated, the strong demand for skilled workers shows there is a shortage of skilled local labor to work in the oil, mining, and construction industries. Labor market trends and characteristics A large proportion of Azerbaijan’s population is working-age (15–64 years), and this segment has been growing by about 1%–2% since 2000. Table 1 shows the labor force participation rate measured as the proportion of the economically active working-age population. The labor force participation increased from 47% in 1995 to 54% in 2000 before declining to 52% in 2017. The labor force employment rate followed a similar trend. Men’s participation in the labor force declined from the 1990s to 1998 while women’s participation increased, but both have remained constant during the current decade (Figure 2). Throughout this period, men’s participation rates were higher than women’s, by 2–6 percentage points. The participation of young people (15–24 years) in the labor force, at 34.6%, is the lowest in the Central and West Asia (ADB 2017). A large proportion of Azerbaijan’s labor force has a secondary education (70.4%), but only 16.4% have tertiary education and 5.5% have vocational education (Figure 3). Table 1. Population and Labor Force Overview, 1990–2017 Item 1990 1995 2000 2005 2010 2011 2012 2013 2014 2015 2016 2017 Total Population ('000) 7,132 7644 8033 8447 8998 9111 9235 9357 9477 9593 9706 9810 Working-age population ('000) 4,444 4739 5068 5702 6432 6551 6651 6731 6805 6870 6921 6970 Total population (%) 62.3 62.0 63.1 67.5 71.5 71.9 72.0 71.9 71.8 71.6 71.3 71.0 Labor force ('000) 3,703 3641 4370 4380 4587 4626 4688 4758 4841 4915 5013 5074 Labor force participation rate (%) 51.9 47.6 54.4 51.9 51.0 50.8 50.8 50.9 51.1 51.2 51.6 51.7 Notes: The working-age population comprises people older than 15 years or younger than 64. The labor force participation rate is the total labor force divided by total population. Source: ADB estimates based on State Statistical Committee. 2018a. Labor Market Statistical Yearbook 2018 . Baku. Figure 2: Labour Force Size and Participation Rate by Gender, 1990–2017 6 70 5 65 4 60 3 55 Millions Percent 2 50 1 45 0 40 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Labor force (millions) Labor force participation rate (%) Labor force partipation rate: female (%) Labor force participation rate: male (%) Note: Estimates are for the working-age population (15–64 years). Source: ADB estimates based on State Statistical Committee. 2018a. Labor Market Statistical Yearbook 2018 . Baku. Figure 3: Labour Force by Age Group and Educational Attainment, 2017 100 80 60 40 20 0 Total 15-24 25-34 35-54 55-64 60+ Higher education Secondary specialized education Vocational education Secondary education Main education Primary education Source: State Statistical Committee. 2018a. Labor Market Statistical Yearbook 2018 . Baku . A high proportion (63%) of the working-age population is employed (State Statistical Committee 2018a). The employment rate is 68% in rural areas and 59% in urban areas, reflecting differences in economic activity, such as the large share of the population working in agriculture. Men are more likely to be employed than women (67% compared with 59%). That said, more women than men work in agriculture, trade, education, health, and services; far more men than women work in oil and mining, construction, and public administration (Table 2). Table 2: Distribution of Employed by Sector, 2017 (percent) Sector Total Men Women Agriculture, forestry, and fishing 36.4 30.9 42.2 Mining 0.8 1.3 0.3 Manufacturing 5.2 6.6 3.6 Electricity, gas , and steam production, 0.6 1.0 0.1 distribution, and supply Water supply, waste treatment and 0.6 0.8 0.4 disposal Construction 7.2 12.5 1.5 Trade and repair of motor vehicles 14.6 11.2 18.4 Transportation and storage 4.2 7.3 0.8 Accommodation and food services 1.5 1.7 1.4 ICT 1.3 1.0 1.6 Finance and insurance 0.6 0.6 0.6 Real estate 1.8 2.2 1.4 Professional, scientific, and technical 1.5 1.8 1.2 activities Administrative and support services 1.2 1.4 1.0 Public administration, defense, social 5.9 9.4 2.1 security Education 7.8 4.1 11.9 Health and social work 3.9 1.8 6.2 Art, entertainment, and recreation 1.7 1.4 1.9 Other service s 3.2 3.1 3.4 Total 100.0 100.0 100.0 ICT = information and communications technology.