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Sri Lanka Jobs Diagnostic Summary

Core Content

This report, authored by Elizabeth Ruppert Bulmer, presents a comprehensive analysis of Sri Lanka's labor market and outlines key policy recommendations to support economic transformation and improve job quality. It highlights the challenges faced by the labor market due to structural and demographic changes, as well as the impact of the global economic crisis, particularly the effects of the COVID-19 pandemic.

Main Viewpoints

1. Economic Transformation and Structural Shifts

• Sri Lanka has undergone significant structural transformation over the past two decades, shifting from agriculture to industry and services.
• Employment has increasingly moved to urban centers, especially around Colombo, with a notable rise in wage employment.
• Between 2006 and 2017, the economy added over 1.5 million jobs, with more than one million being wage jobs (about half formal).

2. Job Quality and Informality

• Despite growth in job creation, 70% of jobs remain informal, indicating low average job quality.
• Informal workers earn significantly less than formal workers, lack pension coverage, and face greater job insecurity.
• Women are more likely to be informally employed and often work in unpaid family roles or low-productivity sectors.
• Occupational segregation persists, with women concentrated in low-productivity textile and food and beverage manufacturing, which contributes to gender pay discrimination.

3. Private Sector Challenges

• The private sector, which is crucial for job creation, faces structural rigidities such as limited access to external markets and a lack of competition.
• Most firms are micro-sized and characterized by low productivity and wages.
• A small number of large, dominant firms in sectors like apparel and textiles have hindered innovation and growth.
• The private sector's ability to create better jobs is constrained by outdated labor regulations and high compliance costs.

4. Youth and Labor Market Outcomes

• Youth educational attainment and aspirations have increased, but labor market outcomes remain stagnant.
• Formal employment is preferred due to job security, even though many youth are not suited or interested in entrepreneurship.
• Urban youth are more optimistic about future employment than rural youth, who face more limited opportunities and are often dependent on social capital to secure jobs.

5. Policy Challenges and Recommendations

• The state's dominance in the economy distorts markets and hinders private sector development.
• Labor regulations designed to protect workers actually limit job creation and productivity, especially for women.
• The report outlines five key policy channels to improve labor market outcomes and promote a more dynamic, skill-intensive economy:

Key Policy Channels

(a) Reduce Barriers to Firm Growth and Productivity

• Encourage SMEs to grow and innovate.
• Improve access to external markets and support export promotion.

(b) Revise Labor Market and Government Employment Policies

• Update labor regulations to reflect modern employment practices and gender inclusivity.
• Promote fair competition and reduce the dominance of a few large firms.

(c) Enhance Youth and Women's Capacity for Better Jobs

• Address gender bias in education and employment.
• Improve access to skills training and education for women and youth.

(d) Increase Productivity of the Self-Employed

• Support self-employed individuals through access to finance, training, and digital tools.
• Promote better working conditions and formalization of self-employment.

(e) Improve Job Matching Between Workers and Employers

• Enhance labor market information systems.
• Facilitate better communication and access to job opportunities.

Key Recommendations

Short-term Actions:

• Strengthen linkages between foreign investors and SMEs to boost exports.
• Update quality standards, accreditation, and facilities to meet international trade requirements.
• Eliminate gender-based discrimination in laws and regulations.
• Shift maternity leave financing to the state to reduce employer disincentives to hire women.
• Apply a gender lens to government communications and policies to ensure gender neutrality.
• Consolidate EPF/ETF accounts to improve access and coverage for workers.

Strategic Medium-term Priorities:

• Develop an SME business support services ecosystem to help firms upgrade and expand.
• Encourage innovation and investment in new or adapted production technologies.
• Create an enabling environment for digital solutions through regulatory support, digital infrastructure, and ICT literacy.
• Support manufacturing productivity upgrades, especially in textiles and food and beverage sectors.
• Strengthen quality standards and accreditation systems to enhance competitiveness.

Conclusion

The report emphasizes the need for a coordinated shift in strategy and supportive policies to enable Sri Lanka to move beyond labor-intensive models and into a more skill-intensive and competitive economy. Without such reforms, the country risks falling behind more dynamic and innovative economies. The recommendations aim to address systemic labor market distortions, gender inequality, and informality, while promoting private sector development and job quality improvement.

Key Data and Trends

• Employment by sector (1997-2017): Shift from agriculture to industry and services.
• Informal employment: 70% of total employment, with women more likely to be in informal roles.
• Wage employment growth: Stronger than non-wage employment, signaling economic development.
• Job creation in high-productivity sectors: Finance and real estate show strong growth, while transport and communications see a decline.
• Public sector dominance: SOEs outcompete private firms and limit competition.
• Gender wage gap: Women earn a 82% wage premium in public sector jobs compared to private sector.
• NEET rates: Female youth NEET rates remain high at around 50% for women aged 25–29.

References and Acknowledgments

• The report was prepared with support from Survey Research Lanka (Pvt) Ltd, Sri Lanka's Department of Census and Statistics, and various World Bank consultants and economists.
• The analysis of the economic census data was conducted in collaboration with Udayakumary Maheswaran and her team.
• The qualitative study on youth and gender was conducted by Survey Research Lanka (Pvt) Ltd.

This report serves as a critical guide for policymakers and stakeholders aiming to modernize Sri Lanka's labor market and promote sustainable economic growth.