Building the skills for the new economy

This report examines the challenges in the labor market in Mongolia as the economy has undergone a transformation into a market economy. It identifies three major interrelated challenges—joblessness, informality and skills mismatch. The inability to find productive employment has important poverty implications, as labor is the main asset of the poor. But along with the skills mismatch, they also affect efficiency, and thus economic growth, by preventing the economy from using the available human capital to its fullest potential.

The second part of this report explores the factors underlying these challenges in order to identify policy and market failures, and thus the challenges for policy. International best practices are then discussed to provide policy options to address these challenges. Table 1, at the end of the executive summary, provides a summary of labor market challenges, underlying causes and proposed policies. The report shows that a key constraint for future growth from the perspective of human resources is the failure to provide adequate learning opportunities, school curricula and teaching for producing the skills that are in high demand. But even if the supply of skills and labor were to be appropriate to market needs, access to productive employment would still be limited by a poor investment climate for firm growth.

The challenges in the labor market

Prior to the transition, all working age Mongolians were guaranteed a job for life. School graduates were assigned to jobs according to the needs of the planned economy. All Mongolians had free access to education, whose curricula and fields of specialization were designed to serve the needs of the regime. Mongolia suffered a “transformational recession” during 1990-93. Restructuring and privatization of state enterprises resulted in massive layoffs and most workers lost their right to a pension. Since 1993, however, the Mongolian economy has grown continuously.

Unable to find a job—unused human capital. But economic growth has not generated enough employment in the private sector. There are persistently high rates of joblessness among the working age population—27 percent are out of work and out of school. This mainly reflects idleness—about 21 percent of the working age population is idle, defined as not looking for a job and out of school. Idleness rates are consistently high across different groups but it hits harder on urban residents with no general or vocational education. Idleness rates remain high throughout working life and peak just before retirement, reflecting the impact of incentives for early retirement in Mongolia—41 percent of 45-54 year old women and 42 percent of 55-59 year old men are already receiving pensions.

Getting stuck in ‘bad’ jobs—job informality. And while many people have not been able to find jobs in the new economy, those who do find employment have been increasingly segmented into ‘bad’ jobs—low productivity jobs with no social security benefits and limited or no labor protection, and ‘good’ jobs. Most workers (60 percent) are ‘informal’ and most informal workers (92 percent) are low skilled self-employed workers in agriculture, who lost the universal ‘right’ to a pension in 1995. While overall informality is declining, because of the decreasing share of agriculture in total employment, the share of salaried workers with no social security benefits is increasing. Informality is very high among youth (80 percent) and many get stuck in low productivity-low benefit jobs. Workers with low levels of education are more likely to be informal, but informality is also high among the more educated.

Bringing skills that are inadequate to market needs—skills mismatch. The Mongolian economy is changing and so is the demand for skills. The changes in the structure of the economy, greater openness and competition, as well as greater use of technology have all resulted in increased demand for skilled labor, although from a low base—Mongolia is far from being a high skill-intensive economy. But so (and more importantly) has the nature of the skills demanded changed towards more general skills that allow workers (and firms) to ‘survive’ and quickly adapt to changes in demand. The skills that are in increasing demand include thinking skills, behavioral skills, practical knowledge (English and IT) and technical skills. In today’s complex and changing environment, the challenge is to build skills that allow young people to think critically and creatively, to process information, to make decisions, to manage conflict, and to work in teams.

But the supply of skills has not responded to these changes in demand, resulting in a mismatch between the skills that workers bring to the labor market and those demanded by the labor market. About 30 percent of firms in the ICS report the supply of skilled and educated workers as a major or severe concern. Firms have a hard time filling vacancies for skilled workers, which is mainly due to the lack of required basic skills of applicants, particularly among vocational education graduates. Most workers feel they lack the skills to make the most of their jobs, particularly ‘general’ skills—93 percent of workers report critical and creative thinking and behavioral skills (communication skills, work discipline, leadership and team work) among the three types of skills they lack the most in doing their jobs.