At the beginning of 2019, the population of Azerbaijan was 9 898 000. In the period from 2006 to 2018, the average annual population growth rate was about 1.3%, one of the highest in Europe.

Table 2.2: Population of Azerbaijan, from 2010 to 2018

Source: The State Statistical Committee of the Republic of Azerbaijan (data received)

At present, Azerbaijan is one of the few countries in Europe to have a young age structure. The proportion of the population aged 0 to 14 decreased from 28.7% in 2010 to 20.7% in 2018, and the 15 to 64 age group increased from 65.8% to 70.9% in the same time. Young people aged 14 to 29 years constitute 25.5% of the country's population. Compared to 2003, the proportion of people aged 65 years and over in 2018 has risen from 6.0% to 6.6%.

Figure 2.1: Relative size of youth population (%)

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Source: The State Statistical Committee of the Republic of Azerbaijan (data received)

In 2018, 20.7% of the total population were aged 0 to 14 years. The high proportion of young people is reflected in an increase in their share in the working-age population, and this trend will continue for some years. The relative size of the youth population provides a measure of the size of the potential group of new entrants to the labour market relative to the whole working-age population. It is also a manifestation of the scale of the challenge facing the country when it comes to the education and training system to provide young people with appropriate skills. In the period from 2017 to 2025, it is anticipated that 125 200 people will enter the labour market every year, which is almost 2.5 times higher than the number of jobs created in one year (Salmanova, 2017).

About 52.9% of the population live in urban areas and 47.1% in rural areas. Between 2000 and 2017, the urban population increased by 26.58%, while the rural population increased by 17.46%, showing the acceleration of urbanisation. However, the process is not uniform. Absheron and Baku are predominantly urban, while most other economic regions are mainly rural. A significant number of rural migrants have settled in big cities, such as Baku, Sumgayit and Ganja. Today, almost half of the urban population resides in Baku, causing negative consequences, such as overpopulation, environmental degradation, congestion, traffic jams, unemployment, pollution, and difficulties with water supply and sewage systems. According to Baku City Statistics, approximately 2 249 500 people live in Baku, with the highest level of population density in the country: 1 051 people per square kilometre (Alakbarov, 2017).

As in other developing countries, rural–urban migration in Azerbaijan has led to overcrowding of metropolitan Baku and its suburban areas (villages and towns in Absheron in close proximity to the capital). A depressed economy and lower standards of living force villagers to Baku (the centre of the oil industry) or Absheron (with a comparatively lower cost of living but geographic proximity to Baku). Overcrowding affects the livelihood of a considerable number of communities and residents. In recent years, only Baku and Absheron have experienced positive net migration, while other (primarily rural) regions have a negative migration track record. The highest migration outflow is registered in Lankaran and Aran, where the share of rural residents is 75% and 60%, respectively. These two regions also have higher birth rates compared to the national average, which creates additional surplus in the workforce (Sadigov, 2013).

Once settled in Baku, rural migrants face a highly competitive labour market, in which they do not have much to offer (due to their low levels of education and lack of skills). With growing competition for lower-skilled jobs in the capital's labour market, rural migrants usually get part-time, seasonal, short-term jobs in low-skilled occupations, such as retail sellers, loaders, taxi drivers, waiters and dishwashers (Sadigov, 2013).

The marketisation of the country's economy in the 1990s and the changing demographics of the city – driven largely by the further influx of thousands of rural migrants and refugees – turned the city's social geography upside down and reconfigured the character of the city's districts, both central and outlying. The 11 administrative districts of Baku cover only roughly 4% of the territory of the country. However, that territory now hosts 30.6% of the economically active population and generates 76.8% of the country's GDP (75.6% of which is concentrated in 'proper Baku'). By 2017, 85–90% of national income was generated in the Greater Baku area (SSC, 2018; Valiyev and Wallwork, 2019).

At the end of the 1980s, more than 250 000 ethnic Azerbaijanis were deported from Armenia on the eve of the collapse of the former Soviet Union. Azerbaijan faced migration problems due to the political and economic crisis in the early 1990s. The occupation of 20% of the territory by Armenia and the resulting one million refugees and internally displaced persons (IDPs) has had a big impact on the economy. Nowadays, Azerbaijan continues to host a large number of IDPs due to the 30-year dispute with Armenia over Nagorno-Karabakh. Official statistics provided by the State Committee for Refugees and IDPs put the number of IDPs at 789 000, while the United Nations High Commissioner for Refugees (UNHCR) refers to around 613 000 IDPs as of 2016. A further 68 000 persons have been internally displaced since 2009 due to natural disasters. Refugee inflows from other countries have increased but remain low compared to other countries in the region.

Vocational education has been affected, mainly as some refugees and IDPs were settled in the dormitories and facilities of VET schools. About 7 000 people, live in 31 VET institutions all around Azerbaijan (Kazimov and ETF, National Torino Process report).

After the fall of the Soviet Union, during the transition to new social and economic systems, there was mass emigration of citizens of Azerbaijan which led to tension in the labour market. As a result of more recent socio-economic developments and an increase in living standards in the last decade, mass emigration has slowed down, but so-called brain drain (i.e. the migration of highly trained or qualified people to other countries) may affect the labour market and bring further challenges in the coming years. In general, Europe is increasingly becoming attractive destinations for migrants from Azerbaijan – at least 42 000 Azerbaijanis currently live in the EU, although the Russian Federation remains both the main country of destination and origin (of immigrants and returning migrants). Based on data compiled for this report, total net emigration from Azerbaijan is still negative.

In 2018, more than 44 000 foreigners moved into the territory of Azerbaijan. More than 26 000 of them were men and 18 000 were women. The vast majority of foreigners who live in the country are individuals between the ages of 19 and 35 (43%) and 36 and 60 (37%) (Kazimov and ETF). A growing number of short-term migrants come to Azerbaijan: 48 500 temporary residence permits were issued in 2016 and 54 000 in 2015, mostly for citizens of Turkey, the Russian Federation and Georgia. Permanent residence permits may only be issued after at least two years of residence. More than 3 200 of these permits were issued in 2016 (ICMPD, 2018).

In 2018, the Human Development Index for Azerbaijan was 0.75, an increase from 0.63 in 1999, growing at an average annual rate of 0.92%.

Azerbaijan's labour market has a few positive characteristics, but it also faces several challenges. The positive characteristics are a relatively high economic activity rate, a low unemployment rate, and high flexibility. The activity rate reached 70.5% in 2018 (up from 68.4% in 2013), with differences between men and women (78.2% and 63.8%, respectively), and is one of the highest in the EaP. The employment rate was 67.0% in 2018, much higher for men (75.0%) than for women (60.1%). The overall unemployment rate was low, at 4.9% in 2018, with a minor decrease from 5.0% in 2017. It is higher for women (5.8%) than men (4.1%)

Figure 2.2: Activity rate (2018) (%)

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Notes: AM = Armenia; AZ = Azerbaijan; BY = Belarus; GE = Georgia; MD = Moldova; UA = Ukraine

According to preliminary data for January 1, 2019, there were 5 133.100 economically active people, of which 4 879.300 were employed. The labour force participation rate also varies across urban and rural areas. The unemployment and inactivity rate are usually higher in urban areas. In rural areas, due to subsistence agriculture, labour force participation is high.

The service sector is the largest source of employment and provides jobs for almost half of the workforce (49.1% in 2018). The agriculture sector accounts for the smallest share of GDP, but provides employment to 36.3% of the workforce, suggesting subsistence-type farming. It also generates about two-fifths of household income in rural areas. The industrial sector accounts for the lowest share of employment (14.6% in 2018), but the highest share of contribution to GDP.

As a result of recent market-oriented reforms and structural changes in the economy, the share of people employed in the private sector has been increasing. An important characteristic of the employment structure is a high level of self-employment, which has risen noticeably since 2000, reaching 68.3% in 2018. Self-employment has increased across all sectors, particularly in agriculture and construction. In addition, the proportion of informality is high, mainly in agriculture but also in other sectors such as transport, manufacturing, trade and construction. Incidence of vulnerable employment is also high, at 55.2% in 2018, and is one of the highest in the EaP countries.

A closer look at youth performance in the labour market in Azerbaijan indicates important findings. Although over the past decade the government has managed to put in place policies to support active engagement of young people in the labour market and notable improvements have been seen in relation to youth unemployment, the youth unemployment rate still remains much higher than overall unemployment. As an example, the youth unemployment rate declined from 13.7% in 2013 to 12.7% in 2018. However, 12.7% youth unemployment is almost 2.6 times more than the total unemployment rate of 4.9% in 2018. Youth unemployment is higher among females than males (14.7% and 11%, respectively in 2018) and young women are more likely to be affected by vulnerable and marginal work than men. The high unemployment rate among young people compared to general unemployment can be explained by limited job opportunities, lack of work experience, and relatively high reservation wages (i.e. the lowest wage a worker is willing to accept). Percentage of young people not in education, employment or training (NEETs) is also high and reached 23% in 2017.

Figure 2.3: Activity rate of Youth 15 to 24-YEAR-OLD (%)

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Around 91% of economically active young people have a medium or high level of education, yet many work in jobs requiring different levels and profiles of qualifications. More than a quarter of young people work in manufacturing, around 20% in ICT, followed by agriculture and transportation. The transition to work for young people remains a challenge. While there is no available data on the average transition time, graduates struggle to find jobs. According to a 2016 survey, more than one-third of young people in employment found their job by word of mouth and 30% through advertised vacancies; only 8.4% of young people in employment found their job through the state employment service (SES). The youth unemployment rate, which is calculated by dividing the number of unemployed persons aged 15 to 24 by the total population of the same age group, was 5.6% in 2018 and has been rising since 2010. This is also a measure of the overall probability of young people being unemployed and the associated underutilisation of their skills.

Qualification and skills mismatch affect many young people, yet good-quality retraining and upskilling opportunities, as well as internships to acquire practical experience, are relatively scarce. The qualifications mismatch affects over 44% of employed young people (15–29), according to a 2016 study by the State Statistical Committee (SSC): 37% were employed in jobs not matching their qualifications, while 7% were partially matched to the profile of their jobs. The survey identified the causes: 30% are self-employed and run small businesses; 19% mention limited employer demand for their qualifications; over 25% mention unattractive working conditions and low salaries. Another study (World Bank STEP Survey, 2013) analysed the perception of employers on skills mismatch and concluded that employers cannot find workers with the right skills for the job, citing problems with the education system. Employers criticised weaknesses in young peoples' technical job-specific skills, but also in cognitive skills and socio-behavioural skills including literacy, problem-solving, communication and teamwork.

According to data 2016 published in the Strategic Roadmap for the Production of Consumer Goods at the Level of SMEs, the contribution of small enterprises and individual entrepreneurs to GDP is limited. Of all registered legal entities, 12% are SMEs, their contribution to GDP is 4%, contribution to employment is 6.3% and contribution to production of goods and services is 9.6%.

Employers claim that it is difficult to find workers with required skills. The shortage is particularly pronounced in the case of modern, innovative firms, which tend to require more advanced skills. Employers seek not only technical, job-specific skills but also cognitive skills (such as literacy, numeracy and problem-solving) and adequate socio-behavioural, soft skills (such as communication, teamwork, leadership and the ability to work independently) (Bayramli et al., 2019). The development of these skills among students represents the main challenge for the education system in Azerbaijan and is critical to address the skills gap. There is no labour market information system to help labour market actors (education and training institutions, students, jobseekers, employers and public employment services) to make informed choices. Furthermore, making the education system more responsive to the labour market requires strengthening the systematic partnership between education institutions and employers.

The skills mismatch is becoming a growing concern; businesses report an inadequately educated workforce as an obstacle to their business performance. Azerbaijan's 2019 Business Climate Survey[8] The Annual Business Climate Survey reflects the views of EU companies operating in Azerbaijan. It is carried out by the German-Azerbaijani Chamber of Commerce (AHK Azerbaijan), with financial and technical support from the EU delegation to Azerbaijan. In 2019, 130 completed responses were selected to represent a valid and statistically significant sample. Respondents represented 16 sectors. Twenty in-person interviews were organised with EU businesses representing 10 sectors.
, for the fourth consecutive year, reported that the shortage of skilled workers is an increasingly significant bottleneck for EU businesses active in Azerbaijan. The number of respondents grading the availability of skilled workers as satisfactory declined from 31% in 2018 to 21% in 2019. Many EU companies remain critical of the quality of academic education and vocational training; 45% deem vocational training to be unsatisfactory. The most frequently cited concerns are about the lack of practical and modern methods and the low level of digitalisation in the education system (Bayramli et al., 2019).

Over recent years, Azerbaijan has been showing steady progress on a number of education indicators. The country has high literacy rates: in 2016, these were 99.79% for adults and 99.94% for young people, with almost universal coverage of primary education (in 2016, the net enrolment rate was 94.93%) and high levels of secondary school enrolment, with a primary to secondary transition rate of 99.42%.

Table 2.3: Educational attainment of active population aged 15+ (%)

Source: The State Statistical Committee of the Republic of Azerbaijan (data received)

The total number of students in the country has been increasing and reached 1.97 million in the 2018/19 academic year. Most of them (1.52 million) were in the general education system. There were 171 154 vocational education students and 51 806 specialised secondary education students. In the same academic year, the number of students in higher education was 184 211, an increase of 38 000 since 2010[9] https://www.stat.gov.az/source/education/?lang=en
. The country has a relatively low share of students in upper secondary vocational education at International Standard Classification of Education (ISCED) Level 3. It decreased from 15.8% in 2013 to 14.2% in 2017, but slightly increased to 14.5% in 2018. The gross enrolment rate in tertiary education is also relatively low (27.2% in 2017)[10] http://uis.unesco.org/country/AZ
, especially when compared with the average of 33.4% for higher middle-income countries. However, it has been steadily increasing.

Table 2.4: Number of students enrolled in vocational programmes at ISCED Level 3 (in thousands)

Source: The State Statistical Committee of the Republic of Azerbaijan (data received)

Since the early 1990s, there has been a negative trend of workers entering the labour market without any specialisation. It is estimated that only 32% of the 4.6 million workers in Azerbaijan have a formal qualification. According to official statistics, each year more than 60% of general education graduates enter the labour market without any specialisation (ETF, 2017). Over the past five years, only around 14% of students of secondary education level were enrolled in VET, with a particularly low share of girls (around 8%), although the total share slightly increased to 14.5% in 2018. As a result of these trends, the young generations of the labour force have basically either secondary general education or higher education. Workforce structure by educational attainment shows that, in 2018, 76.4% of the active population had a medium level of education, 16.6% completed higher education, and 6.6% had primary education or lower. Analysis of the trends over a five-year period points to a slight increase in the share of the workforce with a high level of education against a slight drop in share of those with a medium level of education, while the share of the active population with a low level of education stayed constant. In Azerbaijan, 76.4% of the labour force has completed secondary education, which is the highest in the EaP region.

Figure 2.4: Labour force (aged 15+) by education (2018) (%)

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Notes: AM = Armenia; AZ = Azerbaijan; BY = Belarus; GE = Georgia; MD = Moldova; UA = Ukraine

Development in early childhood is a multi-dimensional process and has significant implications on individual human capital. The Systems Approach for Better Education Results (SABER) (2018a) findings indicate that in the education sector in Azerbaijan, significant disparities exist at the sub-national level, with students in rural areas three times less likely to attend preschool than urban students. Only about 20% of 3- to 6-year-olds are enrolled in preschool education facilities, which makes Azerbaijan one of the countries in the Europe and Central Asia region with the lowest access to preschool education (World Bank, 2018a). Early school dropouts (after basic education – grade 9) are a serious issue in the regions of Azerbaijan, especially in the villages. Girls are influenced by their families to leave school and get married, which is the main reason for female dropouts. To address these negative trends, the government is actively introducing measures to improve these indicators. In preschool education, the focus has been on establishing state-financed school preparation groups. According to the Ministry of Education (MoE), the level of involvement of 5-year-olds in education has increased from 24% in 2013 to 75% in 2018.

The higher education sector in Azerbaijan is composed of 51 institutions (as of 2017). Twenty higher education institutions (HEIs) are public, reporting to the MoE; 13 HEIs are private, overseen by the MoE; and 18 HEIs are public but overseen by various other ministries. Among these, the majority are specialised universities (six with military training focus, for example), and 15 are general HEIs providing a wide range of educational programmes. Azerbaijani universities are heavily concentrated in the capital city of Baku, home to 82% of all HEIs in the country. In 2016, about 164 000 students studied at Azerbaijani HEIs, 88% of them enrolled in public universities. The Azerbaijani higher education system continues to be characterised by low levels of tertiary education enrolment, compared both internationally and against its closest neighbours. In 2016, Azerbaijan's gross enrolment rate in tertiary education was 27.2% (4% in vocational education and 23% in higher education), well below its neighbours Georgia (51.8%) and Armenia (51.2%) . Access to higher education is unbalanced in relation to household income, ranging from 40% among the richest households, those in urban areas, and in Baku city, to only 11% for the poorest households and those from rural areas (World Bank, 2018b).

The success of learners in later stages of education and through life is deeply affected by their performance in general basic education. The Organisation for Economic Co-operation and Development's (OECD) Programme for International Student Assessment (PISA), held every three years since 2000, tests the proficiency level of 15-year-old schoolchildren in reading, mathematics and science. Azerbaijan participated in PISA 2018 research, which took place in April–May of 2018, with 6 872 schoolchildren from Baku included in the international research.

The PISA survey showed that Baku (Azerbaijan) students ranked below the OECD average in all main subjects. Only 2% of students scored Level 5 or higher in mathematics (OECD average: 11%). Six Asian countries and economies had the largest shares of students who did score Level 5 or higher: Beijing, Shanghai, Jiangsu and Zhejiang (China) (44%), Singapore (37%), Hong Kong (China) (29%), Macao (China) (28%), Chinese Taipei (23%) and Korea (21%). These students can model complex situations mathematically, and can select, compare and evaluate appropriate problem-solving strategies for dealing with them (OECD, 2019b; Avvisati et al., 2019). In the post-Soviet region, Azerbaijan only does better than Georgia and Kazakhstan, but only marginally. Test results were equally unimpressive in the field of science, with its score of 398 far below the OECD average of 489. The survey only covered Baku; results would have likely been even poorer had they also covered the regions where school quality is considerably worse. In a country-specific snapshot published separately, the PISA results also highlighted a lack of creative thinking skills and weak school discipline (Gulylev, 2020).

On a larger scale, in April–May of 2016, the main stage of the Progress in International Reading Literacy Study (PIRLS) was conducted at general education institutions at national level, where 170 general education institutions were identified by random selections. Based on PIRLS results, the share of pupils in reading comprehension who performed under the 'low' level was 27% (MoE annual report 2017, 2018).

In 2018, Azerbaijan's public expenditure on education remained at 2.5% of GDP. Overall, this figure is much lower than the average of 4.5% in other Eastern European countries and the averages of higher middle-income countries. However, there is a notable increase in the 2019 budget allocations for education (up by almost 13%) which confirms the government's commitment to continue to improve the country's human capital. In general, VET expenditure in total education expenditure is very low and has decreased over the last five years, from 2.1% to 1.4%. In 2019, approximately AZN 39.6 million was allocated to initial VET, which is AZN 11.7 million more than in 2018.

Although expenditure on research and development (R&D) has been increasing in absolute terms since 2000, total spending remains low as a share of GDP. The AZN 118 million allocated to science in the 2018 national budget accounts for less than 0.2% of GDP. Such levels of investment are not sufficient for a country to make a meaningful impact in advancing its innovation capabilities. Innovative economies of similar size, such as Austria and Sweden, spend about 3% of GDP on R&D, while the OECD average is 2.5%. Azerbaijan's level of R&D investment lags behind Georgia, Armenia, Belarus, Ukraine and the Russian Federation, while its low level is comparable to that of Kazakhstan and Uzbekistan (World Bank, 2018b).

Public funding of R&D in higher education is relatively low in Azerbaijan. Of the AZN 2 001.5 million (3% of GDP) in public funding allocated to education in 2018, approximately AZN 200 million went to higher education (10% of the total education budget, less than 0.3% of GDP). Of this amount, AZN 160 million was allocated to HEIs in the form of per capita student payments, while AZN 42.7 million covered the costs of several budget-funded universities (and mainly financed infrastructure costs). This leaves the majority of universities heavily dependent on tuition fees, limiting their capacity for self-funding substantial research activities. . Relatively little research produced in Azerbaijan has a notable impact on global knowledge creation and diffusion. According to the H-index, Azerbaijan ranks 113^th in the world based on the quality (impact) of its research. This lags behind its regional peers of similar or much smaller size, such as Belarus (73^rd), Georgia (77^th) and Moldova (101^st) (World Bank, 2018b).

In the last few decades, Azerbaijan has been experiencing significant demographic changes: a change in the structure of the population and demand for new jobs, massive urbanisation of major cities, particularly in Baku, and migration phenomena in its various forms. A gradual shift to a new economic growth model that can meet significant challenges of job creation and the reduction of social and regional inequalities will require upgrading and making adjustments to human capital in the country. Adults are profoundly affected by these phenomena, and the impact on human capital and skills mismatch is vast.

Many young people experience extended periods of unemployment. This is an obstacle for their skills development, future employability and earning capacity. A long period of unemployment runs the risk of youth labour market detachment, especially among young women and men seeking their first job. The transformation of the world of work is an ongoing process and it poses a significant challenge for businesses to cope with the skills they need. The existing network of VET providers in general is not able to cover sound quality levels in cost-intensive professional areas of VET, due to the scarcity or outdated nature of existing equipment. VET is faced with deficient levels of participation, with one of the lowest in the EaP.

To achieve the ambitious objective as presented in the Strategic Roadmaps, the government of Azerbaijan is establishing human capital development as one of the key priorities, and developing new skills and capabilities of citizens features high on the reform agenda. The key focus is to proceed with the policy with sustained focus addressing key challenges such as waste of human capital due to youth unemployment, shortages of skills due to low participation in VET programmes and limited human capital development opportunities for adults. Bridging the divide, preparing citizens for the world of tomorrow and making sure that people can be upskilled throughout their life requires rethinking how to deal with human capital and modernisation of education and training systems.