Overview of Azerbaijans Economy

This growth has been driven by domestic demand including non-oil private investments, public investments, government expenditures, consumption expenditures or households, and oil exports. Real GDP has also witnessed tremendous growth owing to growth in the non-tradable sectors including transportation, construction, and public utilities. The capacity constraints, however, did not enable the supply to grow as rapidly as demand leading to inflationary pressures. The objective of this paper is to provide a discussion of the labor cost drivers, labor demand drivers, and labor supply drivers in Azerbaijan.
According to macroeconomic theory, the wage rate usually depends on the price level. The higher the price level the higher will be the real wage rate demanded by workers. Azerbaijan is currently suffering from high rates of unemployment. As a result, wage rates are very low. According to the Human Development and Central Unit (HDCU) and European and Central Asia Region (ECAR) (2005) a vast majority of people in the city of Mingachevir an Industrial city have become redundant as a result of lack of demand for products, which has culminated in production stoppage, bankruptcy, liquidation and corporate restructurings. This has driven the wage rates to very low levels. Based on this one can say that a major determinant of labor cost on Azerbaijan is the demand. The demand for labor in Azerbaijan is currently very low and as such people are willing to supply labor at very low wage rates. The survey by ECAR and HDCU (2005) suggests that only 3% of the unemployed left their job voluntarily. While some workers are not being paid at all, there is also a high degree of wage arrears.
In 2001 exports accounted for 44% of GDP in Azerbaijan with hydrocarbon products being the dominant export activities, contributing to 91.5% of total exports in 2001. The remaining share of exports consists of raw and processed food products, mechanical equipment and chemical product. (Navaretti, 2003).
The largest share of imports is made of machinery for the oil industry, food products, other mechanical equipment, and luxury consumer goods for the high-income part of the population. Many of the country’s traditional products in the domestic market have been replaced by imports because they are unable to withstand the competition of import products. (Navaretti, 2003). Figure 1 below shows that the real wages have taken a downward trend since 2005 to record low levels over the period 2001 to 2006. The figure also indicates that the non-oil sector is lagging behind.
Since imports have become higher than exports, it is likely that the country is witnessing slow growth in aggregate demand, which in turn leads to a slow down in the growth in real GDP. This, in turn, creates a recessionary gap, high unemployment rate and therefore low wage rates. (CFA, 2008). From the foregoing one can therefore rightly say that the wage rate in Azerbaijan depends on the growth in Aggregate demand which has a multiplier effect on the price level, real GDP growth, and therefore wage rates.