The objective of the Jobs Diagnostic (JD) is to generate evidence that will inform policies that create more and better jobs in Mongolia while moving toward a more diversified economy. The strategic direction of the World Bank’s engagement in Mongolia emphasizes jobs as a cross-cutting issue that requires interventions from different sectors. Aligned with this, the JD was initiated to carry out a series of analytical studies intended to provide a rich and nuanced jobs narrative for diversified and sustainable job creation in the country. This task includes core analyses on the macro environment, labor demand, and labor supply as well as in-depth studies in specific areas, including labor market regulations and policies, migration, social assistance programs, COVID-19, and the global green transition. The JD also identifies specific actions and interventions needed to create more vibrant and inclusive labor markets for economic recovery and diversification as envisioned in the recently released New Recovery Policy and Mongolia’s Vision 2050 long-term development framework.
Sustained economic growth and increased labor productivity across the economy over the past two decades have resulted in the creation of better jobs for more people in the country. Annual gross domestic product (GDP) per capita growth averaged 5.4 percent between 2000 and 2019. Population dependency ratios have been falling since the early 2000s, urbanization has increased substantially, and both total and wage employment have experienced substantial growth. Labor productivity rose across the economy, particularly in agriculture but also in industry and services, even as off-farm employment increased. Consequently, average real wages rose. As is usual in growing economies, most of the contribution to labor productivity growth came from within sectors, but structural transformation also contributed, adding about one percentage point to annualized aggregate labor productivity growth from 2000 to 2018. During this period, the shares of both agricultural employment and agricultural value added in the economy decreased. The COVID-19 pandemic had significant consequences for the economy and the labor market, with real GDP contracting by 4.4 percent in 2020—the first decline in a decade—and employment plummeting by about 5 percent in 2021, though the recovery package mitigated an even steeper decline.
Mongolia’s relatively low levels of labor productivity compared to its peers, high degree of volatility, slow capital deepening, and reliance on the mining sector pose challenges for future job creation. Although labor productivity growth has been substantial, Mongolia’s levels of labor productivity are not necessarily high when benchmarked against its structural peers. Capital per worker has grown slowly on average and is heavily concentrated in the mining sector, which, despite its importance to the economy, employs just a small share of the working-age population. Investment mostly has been financed through foreign direct investment (FDI), which moved in parallel with improved terms of trade. The rise and fall of capital inflows, which are tied to trends in Mongolia’s commodity markets, have brought volatility to the overall economy, which, in turn, has slowed per capita growth since 2014. Furthermore, Mongolia has lost comparative advantage in more complex export products over time and has become more specialized in a smaller number of natural resources, posing a challenge for further economic diversification and job creation through nonmineral exports.
Mongolia’s labor force is young and relatively highly educated, but it is aging, and labor force participation is low and unemployment is high. Mongolia is still a young country that can benefit from the demographic dividend, but it is also aging at a rapid pace. Less than 60 percent of the working-age population (ages 15 and older) participated in the labor market, and only about half were employed in 2021. These figures place Mongolia at the lower end of the comparator countries used in this report. At the same time, Mongolia has a highly educated workforce; however, there are concerns regarding quality and inequality in education, with lower outcomes for males, rural areas, and the poor. Returns to upper secondary and college education remain significant, though they have been falling since 2018 and especially so for men. Unemployment is high, particularly in urban areas and among those with an upper secondary education or technical and vocational education and training as well as among youth.
Mongolia’s labor demand expanded substantially over the past two decades, but many of the jobs that have been created are in relatively low-paying sectors. The increase in labor demand mainly has been driven by the private sector, with the number of small businesses having increased disproportionately. Regional employment growth has also been substantial, but the share of jobs in the capital city still increased because many migrants came to Ulaanbaatar (UB) to find employment. Today, Mongolia’s labor demand is dominated by small firms in the commerce sector, and two-thirds of firm based jobs are in UB. The role of the public sector declined substantially but remains significant, especially in regions with limited alternative job opportunities. Nearly 60 percent of jobs created between 2010 and 2020 are in sectors that, on average, pay below the median wage; sectors creating higher-paying jobs include mining and construction, but these have not been major sources of new jobs. The process of labor reallocation within firms is sluggish. Most hires are replacement hires—not adding new job opportunities but rather filling previously vacated positions—in part due to a relatively high number of quits. Constraints related to worker skills and access to finance are reported by many firms. Moreover, recent domestic lockdown measures and border frictions caused by COVID-19 strained mining, manufacturing, construction, and the service sector as a whole and disproportionately affected small and medium enterprises, which limited the creation of high-paying or even average-paying jobs.
Mongolia’s overarching employment challenge is to create more and better jobs than have been created during the past decade; this calls for a multisectoral jobs strategy that drives private sector development. The performance on job creation has not been strong enough to bring more people into the labor force and to reduce unemployment. The overarching challenge the country faces in terms of employment is to create more and better jobs to meet the aspirations of the increasingly educated workforce and to drive higher incomes and productivity. This calls for a more vibrant and innovative private sector and a public policy environment that enables it. An important part of this challenge will be to diversify beyond the resource sector. However, as already noted, the process has been slow, and there is little evidence of emerging sectors that are creating large numbers of good jobs. Actions on the part of the Ministry of Labor and Social Protection and other departments and agencies concerned with workforce development are important for meeting this challenge. But reforms from ministries responsible for economic policy that can transform the private sector must provide the foundation for meeting Mongolia’s jobs challenges.
Going forward, Mongolia also faces employment challenges that are specifically related to inclusion; these include raising labor force participation—particularly for certain groups—and creating more opportunities for young people. Mongolia’s labor force participation rate is relatively low when benchmarked against comparator countries and has been slowly declining. Three particular segments of the working-age population stand out with low participation rates: women, urban residents, and people with intermediate levels of education. The transition of young people into the labor market is important given the country’s large youth cohort and the substantial investments in education. However, this transition is not going well, especially for the less educated, and even young people with tertiary education have inactivity and unemployment rates that are too high.
Constraints to meeting Mongolia’s jobs challenges come from a range of sources, including the skills and availability of workers. On the supply side, labor force skills do not seem to be a universal problem, but skills mismatches are concerning in a couple of specific ways. First, the education and training systems are not preparing adequate numbers of skilled workers in strategic sectors that are critical to the country’s recovery plan and to the longer-term development strategy. Second, a significant minority of recent graduates do not have the skills needed in the labor market, especially to fill higher-skilled jobs. Another supply-side constraint stems from the challenges some women face in participating in the workforce while providing family care (which largely falls on women). It is difficult to disentangle the separate effects of receiving social welfare benefits from a lack of child care options in explaining whether social welfare benefits disincentivize female labor force participation; however, overlapping benefits among households with children tend to be generous, and a lack of incentives to participate in the labor force and effective activation measures are causes for concern.
As already noted, significant constraints also exist on the demand side of the economy and result in a private sector that has not been dynamic enough to generate the needed job creation. Most unemployed workers cite a lack of jobs as the main barrier they face in finding employment. Mongolia’s firm landscape is dominated by small firms, very few of which seem to grow into larger companies that employ a lot of workers. Indeed, firms report a range of barriers in their business environment that they feel limit their operations. These include political instability, taxes, access to credit, and corruption. However, not all demand-side constraints are due to policies. Mongolia’s geography and extremely low population density are inherently limiting factors in terms of allowing the country to benefit from agglomeration effects. This will require special efforts to connect regions and to exploit the potential of the country’s single large urban area.
The JD proposes policy recommendations in a range of areas to address these supply and demand constraints to job creation as well as to improve the functioning of the labor market. The policy recommendations are meant to address the constraints affecting job creation and the particular challenges we have identified regarding employment. Taken together, these actions address the challenge for more dynamic job creation in the private sector, which will lead to better jobs and more opportunities for groups with high levels of exclusion from the labor market. Some recommendations focus on enhancing the labor supply. These cover reforms to improve the skills development system as well to create incentives and pathways for social welfare and unemployment benefit recipients to (re)integrate into the labor market. Several recommendations are intended to improve the functioning of the labor market. These include proposals to build a comprehensive labor market information system, to enhance the capacity of active labor market programs to support job seekers, to increase the protection offered by unemployment insurance, and to strengthen labor regulation through improved enforcement. Finally, with respect to labor demand constraints, some proposals are put forward to improve the business climate to encourage diversification and job creation. These proposals add to recommendations already made by the World Bank in recent reports that address various issues related to economic development and diversification.