This section reviews the state of human capital development and how key strategies may help bring improvements, mainly in employment and education. It does so from several perspectives. First, it looks at the people who participate in human capital development. Secondly, it examines the use of human capital, mainly in the labour force. Thirdly, it focuses on women in the labour market. Finally, it considers the resources associated with human capital development.

Armenia's problems arise from multiple sources. It will take time to resolve them. Such efforts will require closer alignments of diverse policies, such as those related to employment, education, and small businesses.

The assessment takes a broad view of human capital and looks beyond public institutions and accredited training programmes. It does so because individuals acquire skills and capacities from multiple sources and develop these skills through participation in employment, which is itself a source of human capital development. Adopting a broader perspective on human capital enables the assessment to consider the impact of informal employment, job quality and mobility within the labour market.

As stated above, professional expertise is developed not only in education and training and the institutions that supply them, but also through work experience. The quality of work is important. This includes the diversity and richness of tasks and opportunities for individuals to use their capacities and develop expertise[20] See for example, Keep, EJ, James, S (2012) “Making Bad Jobs Better – Trends, determinants and responses to job quality in the twenty-first century”, In: C Warhurst, P Findlay, C Tilly, F Carre (eds.) Making Bad Jobs Better – Trends, determinants and responses to job quality in the twenty-first century. Basingstoke: Palgrave Macmillan. 240-253
Ewart Keep & Susan James (2012) A Bermuda triangle of policy? 'Bad jobs', skills policy and incentives to learn at the bottom end of the labour market, Journal of Education Policy, 27:2, 211-230, DOI: 10.1080/02680939.2011.595510
More Effective Skills Utilisation: Shifting the Terrain of Skills Policy in Scotland SKOPE Research Paper No. 107 January 2012 Chris Warhurst and Patricia Findlay University of Sydney and University of Strathclyde
Origins and Consequences of Changes in Labour Market Skill Needs Considerations from a European Perspective, Analytical Report for the European Commission, prepared by the European Expert Network on Economics of Education (EENEE). Martin Schlotter
Improving Skills Utilisation in the UK – Some Reflections on What, Who and How? SKOPE Research Paper No. 124, August 2016 Ewart Keep Director, SKOPE, Centre for skills Knowledge and Organisational Performance
. In addition, higher quality employment opportunities usually support longer-term professional development, including better salaries, promotions, training, job security, and flexible working conditions. Such features provide employees with stable foundations on which to build their own human capital on the job.

Armenia suffers from a bottleneck in skill formation. More skilled workers are needed.

This will mean shifting away from government-run training programs. Firms will need to rely less on external sources of training and more on in-company schemes. The shift will also change the target audience for training and development from students to workers.

Based on data from Armstat, ETF believes that 19 676 students were participating in VET[21] ETF KIESE indicators 2019
– which would translate to 28.4% of the upper secondary student population. Taking into account all relevant levels and sectors (higher education, VET and general secondary), Armstat's data suggest that there were 138 000 full time students in Armenia of working age[22] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Economically Active Population, Table 3.7.
. In addition, according to Armstat each year 19 253 people participate in vocational training in medium and large enterprises[23] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Vocational Training, Table 12.1.
, including 1 100 individuals identified as apprentices. Beyond this, in 2017, a further 34 927[24] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Job Seekers Assistance, Table 10.8
people participated in employment-related training provided through the State Employment Agency of the Ministry of Labour and Social Affairs.

The total figure comes to 192 180 – which would represent 9.5% of the working age population[25] Estimated as 2,021,000 by Armstat in 2018, Labour Resources 2016-2017, table 1.1
. This may be an underestimation as it does not include training or skills formation provided by small businesses, community organisations and NGOs.

This suggests that 100 000 newly skilled people graduate from different programmes each year, according to Armstat's estimates. This covers people in vocational training in enterprises, people participating in training with the State Employment Agency and graduates of all forms of education. In total, this would represent about 5% of the working age population[26] Estimated from 2671 graduates from preliminary VET schools, 7164 from Middle VET schools, 18700 from General Education and 17800 from University plus those in enterprise training and state employment training programmes
.

An overwhelming majority, (73%) receive education and training through institutions of secondary and higher education. The supply of people from this source will decline in line with the fall in the population of young people[27] ETF KIESE indicators 2019
.

This means that the existing public training and education sector may not be able to supply the range and numbers of skilled workers required by the labour market. Policies for human capital development need to be conceived of more broadly. It must extend beyond the current VET sector, which is small and unlikely to grow sufficiently or fast enough. To address the challenges of skill development to support economic growth and facilitate labour market adaptation, policies should focus on continuing education, with the private sector and NGOs playing bigger roles.

An important characteristic of the Armenian economy is the difference between men and women in the labour force. Evidence can be found in their respective employment and activity rates.

In its analysis prepared as part of its partnership agreement with Armenia, the World Bank found significant issues related to women and human capital development. The bank noted that:

There are 1.5 women for every man enrolled in tertiary education, (yet) only 60% of women participate in the labour force, with the widest gap among those aged 25 to 34 years. There is a clear 'gender streaming' dynamic in the subjects that people choose to study, with women tending to focus on social sciences, education, and health rather than science, technology, engineering, and math (STEM) fields. This imbalance lays the foundation for gender-based sector, occupational, and wage differences. Women face an average earnings gap of 33%.

In the labour force, employment rates are 17.6% lower for women, while activity rates are 21.8% higher for men[28] ETF KIESE indicators, 2017 based on age group 20-64
. However, in general, women have higher levels of education. For example, in the working age population, more that 25.7% of women, compared to 23.1% of men, have tertiary qualifications[29] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook Labour Resources. Table 1.9 based on 15-75-year-old group
.

For the economically active population, the respective figures are 32% for women and 27.6% for men. Similarly, a higher proportion of women than men have specialised vocational education. The figures are 26.4% and 19.5%, respectively[30] ETF KIESE Indicators, 2019
.

These differences are also reflected in the employed population. Data show that 31.8% of women with jobs have tertiary qualifications as opposed to 27.6% of men. For those with VET qualifications, the figures are 26.1% vs.19.6%[31] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Employment, Table 4.1.7
^.

In general, the unemployment rates are similar (18% for males and 17.5% for females)[32] ETF KIESE indicators, 2019
.

In the inactive population, twice as many women as men identified themselves as available for work, although not actively seeking it. A key issue could be family circumstances:192 000 cited that as a reason they were unavailable for work. The corresponding figure for men was 3,200[33] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Economically Inactive Population, table 3.15
.

When employed, women tend to occupy job levels at least as high as those of men: 19.5% were classified as professionals vs.13.8% of men; 12% worked as technical professionals, while the rate for men was 5.9%[34] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Employment, Table 4.1.22
.

However, higher levels of educational and similar levels of employment do not translate into commensurate salaries. In general, the average salary for women stands at 67% of that for men. This is sustained across education levels, with the average salary for women with tertiary qualifications being 68% of that for men. For specialised vocational education, the average salary for women was also 67% of that for men[35] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Incomes, Table 5.2
. Salary differences remain consistent by industry, including major ones such as of agriculture, wholesale and retail, education, manufacturing, and public administration[36]Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Earnings, Table 4.17-19
.

Women's participation in the labour force and their returns from education reflect a broader challenge about the use of human capital and its effect on equity. Family responsibilities represent a key constraint on labour force participation for women. For example, 245 300 of the 522 300 women identified as economically inactive were listed as housekeepers; the corresponding figure for men was 3 700[37] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Economically Inactive population table 3.7
. Over time, these differences lead to inequalities. They limit opportunities for women and constrain their ability to overcome poverty through employment. This can have intergenerational consequences. It can also have an impact on the economy as a whole: for example, the skills shortage identified by employers may partly stem from the lower levels of female activity. There`s another potential issue: the growth in the Armenian economy in recent years may have depended in large part on lower salaries among highly skilled women in the labour market.

Employment and labour market participation are important for human capital development. Having a job allows people to extend their skills and develop new capacities, for example as they learn new technologies or new forms of work organisation. The more people who participate in employment, the more likely they will develop themselves. Consequentially, a greater percentage of the working age population will have room for improvement. This phenomenon is reinforced by CVT. Conversely, the fewer people in employment, the fewer people with access to human capital development.

Human capital development does not only emerge from education but also from employment. For the economy as a whole, several factors complement the training system, including the aggregate level of employment, the number of jobs, and the quality of those jobs.

Armenia's key labour market variables (i.e., employment, participation and unemployment rates) suggest few opportunities for human capital development in employment by addressing labour market participation or the type of employment. For example, human capital development opportunities are divided by the differences in formal and informal employment and job quality.

The economic activity rate (also known as the labour market participation rate) is 60.9%. The employment rate is 50.1%[38] ETF KIESE Indicators, 2019
. Differences exist at the disaggregated level: for example, in urban areas, the economic activity rate is 56.9, while in rural areas it is 67%. Similarly, the employment rate in urban areas is 42%, compared to 62.3% in rural areas in 2017[39] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Labour Resources, table 1.1
. There is lower unemployment in rural areas: 7.4% as against 25.7% in urban areas[40] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Labour Resources, table 1.1
.

The following figures describe the aggregate use of qualifications and education in the labour force.

In general, in Armenia, a higher level of education is associated with a higher level of labour market participation. Approximately 73% of those with tertiary education and 62% of those with vocational education are active in the labour market[41] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Active Population, Table 2.8
, while 60.5% of those with tertiary education and 50.1% with VET are employed[42] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Employed, Table 4.1.32
. The corresponding shares of tertiary and VET graduates among the unemployed are 29.2% and 26%, respectively[43] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Unemployment, Table 9.5
. Likewise, a lower percentage of more highly qualified people are inactive.

Although the employment rate is higher in rural areas, the quality of human capital development may be lower, as a higher proportion of employment is informal.

The share of informality among total employment is 44.5%[44] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Labour Resources, table 4.3.1
. Some 70% those with informal jobs did not have a tertiary or vocational qualification; of this group, 75%, were working in the rural sector[45] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Labour Resources, table 4.3.1
. This may indicate that higher levels of qualification, such as tertiary or vocational qualification, lead to higher participation rates in the formal sector, while lower, levels of attainment are associated with the informal economy and, within that, the rural sector.

Data suggest that Armenia is falling behind in its use and development of human capital in the labour market and that this is a major challenge for the use of skills, including the availability of jobs and the quality of employment.

Higher levels of qualification, however, will not necessarily lead to higher levels of participation or employment; for example, 29% of inactive persons identified the absence of employment opportunities as their principal obstacle to participation, whereas only 3.8% said that relevant qualifications would solve their problems[46] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Labour Resources, table 3.19
. Similarly, lack of mobility is a factor: 69.6% of employed people, 46.7% of unemployed, and 66.5% of the inactive stated that they would not move to take a job[47] Labour Market in the Republic of Armenia, 2013-2017 Statistical Handbook, Labour Resources, tables 4.1.28, 3.23, 9.21
.

Raising qualification levels without also increasing the number of jobs will generally lead to reshuffling people in the labour market.

As the system as it develops, one major challenge is the need to increase the resources available for education. Presently, public expenditure on education is very low. At 2.8% of GDP, it corresponds to only 58% of the EU-28 average of 4.7%[48] ETF KIESE Indicators, 2019
. Expenditures on labour market programmes are also low[49] Asian Development Bank, 'Good Jobs for Inclusive Growth in Central Asia and the South Caucasus, 2019; p84, Box 5
.

Table 2: Expenditures on active labour market programmes

Year	2010	2011	2012	2013	2014	2015
(%) Share of ALMP expenditures in state employment programme spending	13	6.4	32	36	52	94
(%) Share of ALMP expenditures in total budget	0.07	0.03	0.12	0.1	0.07	0.1

Source: Asian Development Bank, 2019

Funding for VET and employment programmes in the 2017 state budget and the 2017-2019 Medium Term Expenditure Framework (MTEF) was limited. The allocation to education represented 9.38% of the annual state budget for 2017 and 8.68% for 2018; only 0.81% in 2017 and 0.72% in 2018 went to preliminary and middle-level VET.

The MTEF had foreseen a rise of 20.33% for VET between 2017 and 2019, representing approximately €3.429 million[50] Republic of Armenia Ministry of Education and Science Self-Assessment Report on Implementation of Conditions of The EU Budget Support Programme “Better Qualifications for Better Jobs”
. Additional funds for VET, covering both preliminary and middle-level, are expected from other related areas, namely in the Ministry of Sport, Youth, Culture and the Ministry of Labour and Social Affairs.

To achieve the potential promised by the reforms, especially those related to work-based learning, additional resources would be required. For the upcoming development strategy to be effective, policymakers will need to devise a funding stream that supports employment and skill development.

Information about the level of training expenditure by industry is unclear. It is not possible to give a precise or definitive answer to the question of how much extra training will be involved as a result of a new approach to VET and employment policy, or what it will cost.

There is no easy solution to this critical problem, but it is essential to find one. As part of its broader considerations of various policy options, the government and relevant stakeholders, such as employers and NGOs, should conduct a review of the costs of transforming education and training programmes.