The EU's relationship with Azerbaijan is based on the EU–Azerbaijan Partnership and Cooperation Agreement, which has been in force since 1999. The EU's cooperation with Azerbaijan aims at supporting the country's reform agenda, in particular in the domains of economic diversification, sustainable growth and social development, good governance and rule of law, and its connection with the EU through enhanced connectivity, mobility and people-to-people contacts. One of the priorities for EU assistance to Azerbaijan is supporting skills development with a particular focus on VET, aiming to help the country to have a better match between the skills of the labour force and the needs of employers.

The country has rich natural resources, particularly oil and gas. However, the government acknowledges the importance of human capital development as a necessary prerequisite for reduction of the country's dependence on oil and gas revenues, and strengthening its resilience to external shocks.

The primary goal of the government is to speed up economic diversification, maintain rapid growth in the non-oil sector regardless of the level of oil and gas revenues, increase competitiveness and expand expert opportunities.

This assessment finds multiple systemic challenges concerning the development and use of human capital in Azerbaijan, which may jeopardise further progress and the sustainability of reform achievements to date.

Three key issues have been identified in relation to the challenges relating to human capital development.

1. Skills shortages due to low participation in VET

Skills mismatch is becoming a growing concern where businesses report an inadequately educated workforce as an obstacle to their business performance. On the Global Competitiveness Index, the country ranks 58^th out of 141 countries, with particularly poor performance in 'digital skills for active population' and 'ease of finding skilled employees'.

The qualifications mismatch affects over 44% of employed young people (aged 15 to 29), according to a 2016 study by the State Statistical Committee (SSC), and 37% were employed in jobs not matching their qualifications. Yet good-quality retraining and upskilling opportunities, as well as internships to acquire practical experience, are relatively scarce.

Participation in secondary VET is one of the lowest in the EaP region with 14.5% in 2018, compared to around 30% in Ukraine and 40% in Moldova and Belarus. The scope of VET provision is limited due to a lack of infrastructure and adequate training staff as well as a low interest in VET, as seen in the low enrolment numbers. There is a lack of functional and institutionalised platforms for cooperation. Furthermore, there are no financial instruments in place to give incentives to employers to strengthen their involvement in VET.

2. Waste of human capital due to youth unemployment

According to the World Bank's Human Capital Index released in 2019, Azerbaijan ranks 69^th out of 157 countries.

The country has a young population. In 2018, 20.7% of the total population were aged 0 to 14 years. The high proportion of young people in the population's overall structure is reflected in an increase in the share of young people in the working-age population, and this trend will continue for some years. In the period 2017 to 2025, 125 200 people will be entering the labour market every year, which is almost 2.5 times higher than the number of jobs created annually.

The positive characteristics of the labour market are a relatively high economic activity rate, a low unemployment rate, and a high level of employment mobility. The activity rate reached 70.5% in 2018, with differences between the rates for men and women (78.2% and 63.8%, respectively). The employment rate was 67.0% in 2018, higher for men (75.0%) than for women (60.1%). The overall unemployment rate is low, at 4.9% in 2018. It is higher for women (5.8%) than for men (4.1%) (ETF data collection, data received from the SSC, 2018).

The negative features of the country's labour market include relatively high youth unemployment of the total unemployed population (12.7%), vulnerable employment (55.2%), a high percentage of self-employed people (68.3%), especially in agriculture and construction, and higher growth in wages than in labour productivity (ETF, 2019a).

Although the youth unemployment rate has been steadily decreasing over recent years, it is still higher than the overall unemployment rate and stood at 12.7% in 2018. Youth unemployment is higher among females than males (14.7% and 11.0%, respectively, in 2018), and young women are more likely than men to be affected by vulnerable and marginal work. The percentage of those people not in education, employment or training is also high, reaching 23.0% in 2017.

A shortage of career guidance and professional orientation services leads to long periods of job search. The new Youth Employment Programme has the potential to address these issues.

3. Limited human capital development opportunities for adults

Public expenditure on education remained at 2.5% of gross domestic product in 2018. Overall, this figure is lower than the average of 4.5% in Eastern European countries and the average for higher middle-income countries. However, there is an almost 13% increase in the 2019 budget allocations for education, which confirms the government's commitment to continue to improve the country's human capital. In general, VET expenditure as a share of total education expenditure is very low and has decreased during the past five years, from 2.1% to 1.4%.

Participation of adults in education and training is limited, and there are a number of obstacles. Occupational standards are generally seen as the new starting point for developing state educational standards, but there is currently no system-wide use of them.

Azerbaijan has moderate levels of educational attainment among its adult population. In 2018 the majority of adults (aged 25–64) had a medium level of education (76.4%), 16.6% had completed higher education, and 7.1% had primary education or lower.

At present, there are limited opportunities for adult learning, skills and career development in Azerbaijan. Problems include the lack of adequate adult training facilities and offers, especially outside bigger urban centres.

The ETF assessment provides concrete recommendations concerning improvement of the strategic framework for the development of human capital with emphasis on the three identified key issues.