Azerbaijan’s labour boom: Path to workforce formalisation

In recent years, Azerbaijan has made remarkable strides in revitalising its labour market amid a changing global environment still grappling with inflation. This recovery, driven by a substantial increase in production and export demand from the non-oil sector, has resulted in a marked increase in labour contracts, underscoring a broader positive trend in the nation’s economic health. A major driver of this growth has been the unprecedented surge in infrastructure and construction projects in the Garabagh region, which have generated significant new employment opportunities.

These projects, in conjunction with self-employment initiatives, are reshaping the region's labour dynamics, facilitating recovery from past conflicts, and playing a pivotal role in the national economy's diversification efforts.

Legislative and Administrative Reforms

Azerbaijan’s labour market success is closely linked to ongoing reforms in tax and administrative systems, led by the State Tax Service (STS) under the Ministry of Economy. These reforms, aimed at increasing transparency, optimising tax administration, and ensuring compliance, have had a deep impact on formalising labour relations. Previously, the practice of 'double accounting,' where employees' actual wages far exceeded reported figures, was widespread, leading to reduced tax revenue and the loss of essential worker rights such as pensions, paid holidays, and overtime payments.

Since these reforms were implemented, there has been a remarkable increase in the number of formal labour contracts. By September 2024, the number of registered labour contracts had increased by 450,972 compared to the start of 2019, bringing the total to 1,852,887. The private sector of the non-oil economy witnessed a 430,502 unit increase in labour contracts, a strong indication of improved job security and formal employment opportunities.

Positive aspects of digitization in Azerbaijan

Azerbaijan's transition to a digital economy is also pivotal in modernising its labour market. Upgrades to digital infrastructure have significantly streamlined administrative processes, making contract registration easier and improving the efficiency and transparency of the tax system. The "Polyhedron-Digital Radar of Azerbaijan" project and the Digital Document Circulation subsystem emphasise reducing paper usage and enhancing inter-institutional communications. These initiatives undeniably demonstrate how digitization is strengthening economic reforms, particularly in formalising the labour market. The emergence of digitization will undoubtedly further encourage the country's informal labour force and enhance the eligibility of the system. The latter is extremely important and will eventually make the process of processing labour pensions, disability benefits, and other social services much easier.

Azerbaijan's commitment to economic reforms, diversification, and digital transformation is evident in the significant rise in labour contracts. By addressing issues of informal employment and enhancing tax transparency, Azerbaijan is laying the groundwork for a more sustainable and equitable labour market. These developments not only strengthen the non-oil sector but also position Azerbaijan as a forward-thinking nation that is actively adapting to the global shift towards a digital economy.

The continuation of infrastructure projects in Garabagh and further optimisation of tax policies are expected to sustain this growth, creating more opportunities for employment and enhancing economic stability across the country.