The Three Strands of SL’s Labour Market

By Paneetha Ameresekere | Published: 2:00 AM Nov 23 2020
FT The Three Strands of SL’s Labour Market

By Paneetha Ameresekere

 This is the first in a two-part series of Sri Lanka’s labour market, based on a report released by the World Bank (WB) on 17 August of this year (2020).

The report focuses on Sri Lanka’s informal labour market which is bigger than its formal labour market and suggests ways and means of formalizing the informal labour market to reduce inequity.

This, the first part of this two part series, with two box articles enclosed, gives an overview of the labour market, while the second and last part has a specific focus on the informal market.

The Sri Lankan labour market appears to be segmented into three strands, the World Bank (WB), in a report released on 17 August, said.

They are: (a) formal public sector workers who enjoy high remuneration, shorter work hours, many holidays, paid leave as well as other benefits and overall job security; (b) formal private sector workers who make up a middle group, with access to social security and some paid leave, but longer work hours and an earnings distribution that is closer to that of informal workers; and (c) informal workers, a group that includes informal employees as well as informal self-employed workers, most of whom are in precarious employment arrangements with little access to any benefits and low remuneration.

The public sector is almost entirely formal, with only a few workers reporting themselves as informally employed. These workers are captured as informal employees in formal firms. Public sector workers are also better remunerated; all this has led to biased incentives toward the public sector.

The public sector has played an important role in creating jobs over the past decade, but this trend is not sustainable. One problem is that better-educated youth are now queuing for public sector jobs because of better benefit packages (e.g., pensions), the WB said.

Most formal workers are entitled to generous paid leave and holidays, adding to the cost of labour borne by the employer. There are also requirements to provide an even higher rate of overtime pay for work on holidays, such as 1.5 times the hourly pay for the first eight hours of work on a public holiday and double the hourly pay for work thereafter and an extra half-day’s pay for work performed on a Poya day regardless of hours worked. Casual and sick leave tend to be taken as an entitlement and not on a needs basis, the WB said.

Further, formal workers hold full-time, permanent jobs (77 per cent), with another 14 per cent employed in part-time, permanent arrangements. Very few, in fact only 9 per cent of formal workers, report having temporary or casual working arrangements. 


Though Sri Lanka has relatively low unemployment rates, underemployment has received little attention despite its relevance for productivity and wages. Underemployment can take several forms, including underutilization of skills; but in this context time-related underemployment is considered, as it is a visible measure of labour underutilization, the WB said.

Meanwhile, a problem occurs when subsistence-level jobs are preferred over unemployment. In this situation, both the absolute shortage of jobs and a continuum of ‘insufficiencies’ related to job quality need to be considered when it comes to assessing job creation.

The WB further said that the majority of jobs created between 2006 and 2017 were informal, more specifically, of the roughly 1.1 million jobs created during this period, slightly more than half were informal. The largest contributor was informal wage employment, with about 21 per cent of jobs coming from an increase in the number of informal employees working in informal firms; another 17 per cent came from an increase in the number of informal employees working in formal firms. Together, the total number of informal employees grew by more than 400,000.

When only private sector workers are considered, the share of informal employment amounted to nearly 80 per cent. Of the 8.2 million Sri Lankans employed in both the public and private sectors in 2017, almost 5.6 million were informal workers, including about 2.5 million self-employed workers (about 31 per cent of total employment) and almost 2.4 million informal employees (about 29 per cent of total employment). Unpaid family workers, most of them women, constituted almost 8 per cent of the workforce.

 Informality rates for women and men are at 64 per cent and 70 per cent, respectively, as of 2017, the report further said.

The proportionately higher representation of women in formal wage employment (34.2 per cent of women, compared to 25 per cent of men) was helped by a recent inflow of mostly highly educated women into the public sector. In fact, female employment grew most strongly in the formal public sector, with an additional 130,000 women working in this sector in 2017 compared to 2006.

The informal employment rate starts out at around 70 per cent for the 15-to-24-year-old cohort, then initially falls, but increases again to over 80 per cent for workers ages 55 and above.


Almost 75 per cent of informal workers had primary education or less, compared to only 35 per cent of formal workers. Less than 10 per cent of informal workers had obtained A-level certification or above, compared to about 45 per cent of formal workers.

The most informal sector by far is the agricultural sector, where 89 per cent of workers are informal. The sector is characterized by a large proportion of informal self-employed (48 per cent) and unpaid family workers (18 per cent). Likewise, the commerce sector and transport and communications sector have comparatively high proportions of informal self-employed workers (39 per cent and 44 per cent respectively), most of whom are performing own-account work. 

Informal employment is high almost everywhere except in the Western Province (WP). The North-Central Province has the highest share of informal workers, at around 79 per cent, followed by the Uva, Northern, North-Western, Southern, and Eastern Provinces, all of which have an informal employment rate of around 75 per cent. The WP has the lowest share of informal workers at around 57 per cent, which is still considerable but substantially lower than in most other provinces. Analysis by geographic sector shows that the rural sector has the highest share of informal workers and the estate sector the lowest share — likely because most plantation workers are entitled to pension benefits.

The high rate of informality has long been attributed to the stringency of labour laws in Sri Lanka. The Termination of Employment of Workmen Act (TEWA) in particular, which makes dismissing employees difficult and expensive, has been at the centre of the debate. It has been argued that the TEWA increases informality, as its provisions are difficult to enforce in the informal sector, and that it reduces job creation in firms with more than 15 workers, which may wish to avoid high visibility and monitoring by the authorities and unions.

The WB’s (2017) Doing Business report, which presents internationally comparable measures of redundancy costs, shows that Sri Lanka ranks second from the top, after Sierra Leone, making it one of the costliest and most restrictive countries in the world to dismiss a worker. The redundancy payments do not take into consideration mandatory contributions made by employers as Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF) benefits. (Next Monday: 70% Informally Employed)

SL Has 50,000 Domestic Workers

 Domestic workers, defined as those reported to be ‘working for a household,’ accounted for a little more than 50,000 workers (or 0.7 percent of total employment), the World Bank (WB) in a report released on 17 August, 2020 said. 

Domestic workers in the labour market, who work in private households, are not entitled to any legal protection with regard to the payment of wages. Domestic workers are excluded from social security based on both the Employees’ Provident Fund Act and Employees’ Trust Fund Act; the former applies to employers with 15 or more workers.

 Sri Lanka currently has no labour law that regulates working time in the domestic work sector. It also has no law that governs the living conditions of domestic workers, meaning that domestic workers are often forced to live in inadequate or unsafe environments, the WB said.

SL Has 282,000 Estate Workers

 Among paid employees in general, almost 90 per cent have both pensions (including employees’ provident fund (EPF)) and a written contract or have neither, the World Bank (WB) in a report released on 17 August, 2020 said.

 The anomaly comes from the roughly 282,000 workers who have pensions but no written contract, the WB said. This group mainly consists of estate sector workers, who have historically had strong collective bargaining power and access to formal pensions, the WB said. As generations of estate workers have spent their lifetime on plantations, signing formal contracts may not have been common practice. Meanwhile, a small number of employees have a contract but no pension, likely because they work in a small firm that is not obligated to enrol their employees in a formal pension scheme, the WB said

By Paneetha Ameresekere | Published: 2:00 AM Nov 23 2020

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