Towards better jobs in Sri Lanka

By Kalpana Kochhar

Accelerating growth in Sri Lanka’s per capita income added a little fewer than 90,000 new jobs every year and improved job quality between 2000 and 2010.

Wage workers, who comprise both casual workers and regular wage or salaried earners, saw their wages — adjusted for price increases — rise at a modest 0.1 per cent per year between 2000 and 2008.

But this appears to mask two contrasting trends, viz., stagnation or modest increases for casual workers coexisting with rapid increases for regular wage and salaried earners especially in the rural nonfarm economy.

Poverty rates among the self-employed, which include employers, own-account workers or unpaid family workers, fell between 1995 and 2006. Thus, the quality of jobs, measured by rising real wages for wage workers as a whole and declining poverty for the self-employed, improved for both groups of workers.

Little has changed

A recent World Bank report, ‘More and Better Jobs in South Asia,’ finds that notwithstanding improvements in job quality within each employment type, little has changed in the proportion of the employed across the two broad employment types – the self-employed and wage earners.

The self-employed make up a little over 40 per cent of the employed, while wage workers account for the remainder – a little fewer than 60 per cent. Although poverty rates have fallen for both wage workers and the self-employed between 1995 and 2006, they have remained consistently higher for wage workers as a whole than the self-employed.

Note that just over a half of wage workers are casual labourers, who are paid on a casual, irregular or piece-rate basis. A little under a half of wage workers are regular wage or salary earners in either the public or private sector who usually also earn leave or supplementary benefits.

Crux of Sri Lanka’s employment challenge

With the number of elderly dependents growing faster than the working age population, Sri Lanka will need to create fewer new jobs than it has historically done – just under 30,000 each year — for the next two decades.

It is easier to absorb new entrants into jobs of lower productivity. However it will be more challenging, but critical, for Sri Lanka’s future success to meet its people’s rapidly rising aspirations by creating jobs of higher quality.

This, then, is the crux of Sri Lanka’s employment challenge. Although the number of new jobs required to be created is less than before, their quality needs to be much better. The country’s employment challenge is substantially compounded by its demographic profile.

Sri Lanka, a lower middle-income country with a GDP per capita in purchasing power parity of $5,000 in 2010, could grow old before it gets rich. How could this happen?

Sri Lanka benefited from a faster growth in its working age population than in its elderly and young dependents till 2005. The resources thus saved — the “demographic dividend” — were available to be channelled into investments in physical capital (e.g., electricity and transport) and human capital (e.g., education and training) needed to create better jobs, provided there was an appropriate policy framework in place for doing so.

Examples of such an enabling framework include an efficiently intermediating financial sector and a business environment attractive to investors. While a stronger policy framework could have harnessed a larger part of the demographic dividend that was available till 2005, some of it was captured with the policies extant in Sri Lanka at the time.

Indeed, there is a broad correspondence between the behaviour of the ratio of the working age population to dependents and GDP growth. The ratio of the working age to the dependent population doubled from 1.1 in 1960 to 2.2 in 2005. Over roughly the same period, GDP growth increased from around 4-1/2 per cent per annum in the 1960s to nearly 6 percent per annum in the 2000s.

Critically, the potential demographic tailwind is now becoming a headwind as Sri Lanka enters old age dependency: the elderly population (aged 64 plus) was 12 per cent of the working age population in 2010 compared to seven per cent in the 1970s. How can its effects be offset?

The answer is that a very significant strengthening of the business environment will be necessary to accelerate growth of aggregate labour productivity. The report suggests that, among other things, sustained attention to the three Es – electricity, education and the entry and exit of firms can make an important difference.

Electricity

Managers of urban formal sector firms which have created jobs identify electricity, uncertainty about Government policy and macroeconomic instability as the three main constraints on their ability to operate and grow.

While the cost of the constraint imposed on firms by the lack of reliable electricity supply is not significantly different in Sri Lanka from that in countries at similar levels of per capita income, the use of generators to mitigate the risk of unreliable electricity supply — an expensive solution – is greater in Sri Lanka than in countries at similar per capita incomes.

Electricity is also among the top constraints reported by rural-based industry and services firms in Sri Lanka, as in Bangladesh and Pakistan. Reforms will therefore need to encourage not only public but also greater private investment in the power sector to reduce shortages faced by users.

The power sector needs to become financially and commercially viable. Improving the governance of power utilities will be equally important. Relaxing the electricity constraint would help firms expand and create jobs.

Education

Another priority will be improving the quality of learning – in primary and secondary schools, universities and training institutions – to raise the quality of skills among the work force. In addition to the knowledge and specific technical skills, it will also be crucial to equip graduates with the analytical and behavioural skills which employers in Sri Lanka demand – and too often miss.

While Sri Lanka’s educational attainments have been traditionally strong, the share of the labour force with at least completed primary, upper-secondary and tertiary education is not out of line with the populous South Asian countries. And completion of upper secondary and tertiary education by young cohorts (aged 15-34) remains low.

Entry and exit of firms

Managers of urban formal sector firms in Sri Lanka, like their counterparts in India and Nepal, report labour regulations as being a more severe constraint to the operation and growth of their businesses than in other countries at similar levels of income per capita.

Laying off a worker without her consent requires not only notification but prior approval by the Sri Lankan State. As regulations become more costly, firms increasingly employ strategies to circumvent them, reducing de facto protection from labour market regulations.

Notwithstanding the generosity of the statutory severance pay system in Sri Lanka, for example, workers often fail to benefit from it because of non-payment or partial payment, particularly during times of economic distress. Limited options and lengthy and costly procedures for resolving disputes and grievances provide additional incentives for noncompliance.

It makes more sense for formal sector job creation to lower these costs, which protect less than a third of workers in Sri Lanka, which has a larger formal sector than the populous countries in the region. This should be accompanied by strengthened labour market programs and institutions to cushion both formal and informal sector workers from labour market shocks and improve their future earning potential.

(The writer is the World Bank’s Chief Economist – South Asia Region.)