**MONGOLIA'S INFORMAL SECTOR** -

**Size and Trends**

**8**

# **2. Observations on the** Size **of** the Informal Sector

I1. An understanding of the size of the informal sector, and the changes over time of the relative importance of informal activity in the economy, are essential for Mongolia's policy makers. The size of the informal sector has direct implications for policies aimed at alleviating poverty and forecasting insurance fund contributions, to name a few. The trends of informal sector growth also present policy makers with a view of how their policies are driving entrepreneurial energy. This section of the report will present analyses of several independent bodies of data providing information on the size of the informal sector and how it is changing during the transition period. First, employment in Ulaanbaatar's informal sector will be examined. It will be argued that official employment statistics unwittingly demonstrate rapid growth of the informal sector, and that roughly one third of the official labor force in Ulaanbaatar are engaged in informal activities. Second, the SSO's household survey data will be used to estimate the contribution of informal earnings to household income in Ulaanbaatar. Informal income has increased in importance during the transition and has come to dominate wage income for many households - nearly half have some informal income, and informal earnings make up about one third of aggregate household income in Ulaanbaatar. Third, a well-known technique for inferring the size of the "underground" economy from monetary aggregates will be employed. This technique suggests that for Mongolia as a whole, underground activity is in the neighborhood of 35% of officially recorded GDP. A summary will be provided at the end of this section.'

## **Employment in the Informal Sector**

12. Mongolia's official employment statistics reveal much about the changing size of the informal sector, despite the fact that they were not designed to capture informal sector employment. Ironically, it is for precisely this reason that they tell so much. After a brief review of the labor market and the sources of employment data, this section will argue that the official statistics mask a large increase in informal sector participation, and the argument will be supported using the results of the informal sector sample surveys. The sample surveys will then be combined with elements of the official employment data to estimate that 105,000 to 130,000 people are engaged in the informal sector in Ulaanbaatar.

### **Background on Employment Statistics in Mongolia**

13. Every _duureg/soum_<sup>_9_</sup> in Mongolia has an Employment Regulation Office'" (ERO) which serves two functions: (i) distribution of unemployment benefits to officially registered unemployed people who meet the criteria laid out in the relevant laws; and (ii) employment broker, attempting to match unemployed people with job openings. Under the new law on unemployment benefits, which went into effect on January 1, 1995, an unemployed person may be eligible to collect unemployment benefits after having paid contributions to the unemployment insurance fund for at least two years - the new law thus became fully operational on January 1, 1997, after the new law had been in effect for two years.

14. Under the previous law, those eligible for unemployment benefits could collect 3 months wages from their former employer, via the ERO. Under the new law, employers and employees each make