Sri Lanka caught in low-productivity trap: IPS
Six consecutive quarters of negative economic growth in Sri Lanka have led to lower wage rates and discouraged workforce participation and skill development, lowering productivity levels and creating a low productivity trap, the Institute of Policy Studies (IPS) said.
Real wages also decreased after high inflation following the 2022 currency crisis.
At a recent discussion, IPS researchers said the negative growth recorded up to the third quarter of 2023 directly impacted the labor market, and the resultant “low productivity trap” has hampered further economic recovery.
The discussion at the launch of the institute’s State of the Economy 2024 report focused on issues within three key aspects of Sri Lanka’s economy: the education sector, labor market, and public sector.
IPS Research Officer Suresh Ranasinghe noted that, between 2018 and 2023, Sri Lanka’s labor force participation rate fell from 51.8 percent to 48.6 percent, while the employment-to-population ratio dropped from 49.5 percent to 46.3 percent. According to Ranasignhe, some of the main issues within Sri Lanka’s labour market include rising labour market inactivity, declining labor productivity and employment growth, and declining high-skilled employment.
“While all three sectors – agriculture, industry, and services – observed negative average labor productivity from 2018 to 2023, the ICT sector stands out, with the highest output per worker.”
In a statement on Tuesday, Oct. 15, IPS said that the discussion had focused on the need to invest in technology, infrastructure, and skill development, particularly within the agriculture sector. Given the ICT sector’s high productivity, recommendations included offering VAT exemptions and bridging the existing skill gap through targeted interventions.
“Only 20 percent of the total workers held high-skilled jobs in 2023, a decline from 23 percent in 2018, mainly due to a decrease in the share of Managers, Senior Officials, and Legislators,” said Ranasinghe.
One potential reason for this decline was the emigration of high-skilled workers during the pandemic and economic crisis, as they sought better wages abroad due to declining real wages in Sri Lanka.
Speakers highlighted the importance of providing competitive salaries and benefits to retain the remaining high-skilled workers at the event.
“In the long term, expanding knowledge-based industries, supporting persistent professional development, and revising public sector policies are important to foster high-skilled employment.”
Rationalizing public-sector employment was also a point of discussion at the event.