Future of Informal Sector Employment in Sri Lanka

By Tharindu Dananjaya Weerasinghe | Published: 2:00 AM Nov 27 2021
FT Future of Informal Sector Employment in Sri Lanka

By Tharindu Dananjaya Weerasinghe

The Extraordinary Gazette Notification dated 25 February 2021, issued by the Commissioner of Labour increased the maximum compensation to be paid to permanent employees employed in the private sector and semi-government organisations up to Rs 2.5 million, if the employment is terminated as required by the organisation. The decision to increase the compensation was effective from 19 February 2021. 

According to the compensation formula introduced on 15 March 2005 under the Termination of Employment of Workmen (Special Provisions) Act No. 45 of 1971, the maximum amount to be paid was Rs 1.25 million. However, the compensation for termination of employment of a permanent employee was increased after 15 years in line with the policy priorities of the Government; Vistas of Prosperity and Splendour.

The amendment to the relevant legal provisions only ensured the job security of the permanent employees working in the formal sector. Currently, the economic situation of those who worked in the informal sector in the country, often on daily income basis, has deteriorated. Moreover, many private sector organisations in the country have implemented strategies to temporarily freeze new recruits and shrink existing staff in order to deal with the post-economic consequences of the Corona pandemic. Accordingly, action was taken to terminate the employment of workers hired on casual, contract and temporary basis. It is estimated that the number of jobs at risk is around one million in Sri Lanka due to the post-economic consequences of COVID-19.

The size of the Sri Lankan workforce

The size of the Sri Lankan workforce is about 8.5 million. Of them, about 3.6 million are employed in private sector organisations. Another 3.4 million are self-employed. The most vulnerable were the jobs of private sector employees in the country. As a whole, many employees who used to work on a temporary basis in private sector organisations have now lost their jobs. 

It is reported that about 30% of the permanent employees in the garment industry of the country have been laid off. Also, about 3.4 million of people who were self-employed are now financially crippled. Analysis of the current economic situation in the country shows that the current situation is not unemployment but underemployment. Whether or not that underemployment escalates into long-term unemployment will depend on the Government's responses via economic management programmes.

In terms of job creation and income generation, the informal sector represents an important part of the economy of many countries. Informal employment in any economy is created by a set of institutions, workers, and activities that operate outside a specific legal and regulatory framework. Generally, the informal sector represents 60% - 70% of employment and 30% of GDP in developing countries around the world.

Sri Lanka also has a large informal economy. According to the Sri Lanka Labour Force Survey - 2016, the informal economy contributes 60.2% of the total employment in the country. In 2021, it is around 70% of the total employment. The majority of those working in the informal economy are self-employed which is around 49.6% of the total employment. Further, the informal sector accounts for 87.5% of the total employment in agriculture in the country. Employees in the informal sector are constantly at high risk of losing their jobs due to unsafe social security schemes and limited rights. 

The real challenge

This shows that creating and promoting jobs in the formal sector alone is not enough. The real challenge is to formalise the informal sector which requires serious compliance with the Recommendations - 204 of International Labour Organisation (ILO), on the transition from informal economy to a formal economy.

According to the classification of the Central Bank of Sri Lanka, private entities that do not contribute to the Employees Provident Fund or maintain a separate provident fund with the approval of the Commissioner of Labour are considered informal sector private entities. But, according to industrial law, companies with 15 or more employees are required to contribute to the Employees Provident Fund. 

Certain industrial laws in force in the country also apply to private companies with 15 or more employees. Accordingly, most micro and small businesses with less than 15 regular employees follow informal employment practices. Furthermore, due to various tax concessions and subsidies, such businesses are reluctant to adopt a formal system. It further fosters informal employment in the economy.

Although Sri Lanka has a number of relatively-advanced social security programmes compared to other South Asian countries, their coverage is limited. Those programmes do not provide adequate access and coverage to employees in the informal sector. Sri Lanka currently has aso the lowest compensation for industrial accidents, deaths and occupational diseases in the Asia-Pacific region which is about 10 per cent less than the amount recommended by the ILO. However, it does not cover employees employed in the informal sector.

The gig economy

'Gig economy' in Sri Lanka also collapsed due to the pandemic. The gig economy is an economy in which there are freelancer workers or independent contractors in the labour market, different from a traditional employment contract between employee and the employer. The provision of transport or vehicle services on a rental basis, accommodation and delivery services are the most popular ‘gig services’ in the Sri Lankan economy. Representing jobs in the informal sector, they are known as ‘gig workers’. Gig workers have no fixed wages or salaries. They do not have a predictable work schedule. Hence, gig workers have no predictable earnings at work.

Under the gig system, companies have the ability to access the services of gig service providers as needed through digital platforms, rather than maintaining a permanent staff. It can effectively manage corporate salary bills. In addition, Gig jobs also facilitates employees currently employed on a permanent basis to generate additional income on a part-time basis. However, the earnings of gig workers who have only gig jobs are not stable; there is also no guarantee of job security. This is because the laws and regulations that are in place to protect workers' rights and welfare in the country are targeted at the employed workers of formal sector organisations and do not adequately cover gig workers.

Although gig services open up new economic opportunities, it is challenging in terms of formal regulation, collection of government revenue and compilation of official statistics. Statistics do not properly include information on those employed in the ‘gig nature’. Therefore, it is said that it underestimates the national income of the country.

New window for employers

Rising employment in the informal sector opens a new window for employers to analyse cost advantages. That is to replace un-skilled or semi-skilled migrant workers to Sri Lanka. An example of this is the construction industry in the country. We often see the use of migrant workers instead of technology substitution to alleviate the labour shortage in the construction industry. Instead of investing in new technology, it is cheaper for construction companies to pay for less skilled migrant workers. This is the situation we see in major construction projects on foreign loans and grants. It poses a serious threat to the informal workers employed in the construction sector in the country, and a loss of opportunities that they deserve in the informal sector.

In the future, Sri Lankan agriculture will also adopt new technologies to achieve higher commercial value. It will reduce the need for workers. If rural workers do not acquire the technical capabilities to engage in agriculture as a job, their jobs will be further jeopardised. Also, the existing labour shortage will affect the Sri Lankan plantation sector to automate various stages of its production process which puts many informal jobs in the plantation sector at risk. If not, they should acquire the relevant technical capabilities of the employees in that field. This is why it is important to bring employees in the informal sector into a formal framework and recreate in a sustainable manner.

Labour laws need to be amended

In the face of rapid changes in the modern labour market, existing labour laws need to be amended accordingly to properly manage the employment of workers in the informal sector as well as job creation in the informal sector. Among them, the establishment of a legal and specific institutional environment that guarantees the rights and the occupational health and safety of workers in informal employment should be a top priority. Also, informal workers have to be pooled and registered which can be done easily through a mechanism with the intervention of local authorities. 

That is where the formalisation of employment in the informal sector begins, as well as its basis. Accordingly, it is easy to identify their training needs, exchange professional strategies and needed technology through relevant pools, and find a market for services. Further, the Government will have to implement social security programmes in the future with a special focus on informal sector workers.

From the above analysis, it appears that, in the future, there will be no more full-time permanent jobs, but part-time and contract employment replacements. In such a situation, there is a need for a National Human Resource Development Policy (NHRDP) aimed at developing labour education and skills for the stability of the informal sector as well as for the regularisation of that part of the labour market. To this end, the empowerment of ICT skills, the support of the Government and financial systems for technological innovations, the promotion of techno-entrepreneurship, and the dissemination of technological benefits are essential. It is also important to strengthen social security provisions and regulate appropriately.

The future labour market is the result of the Fourth Industrial Revolution. The use of digital methods such as artificial intelligence, machine learning, automation and robotics come under the Fourth Industrial Revolution. So, the future is technology and the technological feasibility. Future jobs in both the formal sector and the informal sector will be based on advanced technology. Hence, the survival of informal sector employees abundant in the Sri Lankan economy today,will depend on the lifelong investments needed to gain access to specialised, technology-oriented jobs in the future.

Tharindu Dananjaya Weerasinghe

(Senior Lecturer, Department of Human Resource Management, University of Kelaniya)

By Tharindu Dananjaya Weerasinghe | Published: 2:00 AM Nov 27 2021

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