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Gunatilaka and Vodopivec
formally employed workers, and the other of unprotected and low-paid informal sector workers. This question is studied by analyzing determinants of informal employment and wages, as well as by examining the effects of Sri Lanka’s restrictive severance pay legislation on job creation and destruction and on enterprises’ incentives to increase employment. The chapter first provides an overview of the extent of segmentation in Sri Lanka’s labor market and presents an analysis of personal and community characteristics associated with the probability of being employed in the public, private formal, and private informal sectors. It then analyzes institutional factors responsible for the formation of wages and the resulting wage premiums associated with public and formal private work. The chapter describes employment protection and analyzes its consequences on job creation and destruction and firms’ growth, before concluding by placing the analysis in the policy context.
Determinants of Informal Employment in Sri Lanka Sri Lanka’s labor market divides sharply along the informality margin: a small formal sector of public and private workers sits alongside a large informal sector where working conditions are precarious. In 2006, 66 percent of Sri Lanka’s employed labor force was in informal work (in line with the definition approved by the 15th International Conference of Labor Statisticians). Public employment accounted for a sizable 13 percent and private formal employment for only 20 percent (table 2.1). Of those in Table 2.1
Labor Market Segmentation in Sri Lanka 2006, All Employed
Category Public employment As a share of total employment As a share of total formal employment Private formal employment As a share of total employment As a share of total formal employment Informal employment As a share of total employment
Percent 13.4 39.8 20.3 60.2 66.3
Source: Gunatilaka (2008) based on the Sri Lanka Department of Census and Statistics’ Quarterly Labor Force Survey Data 2006. Note: Definitions of formal and informal employment follow those developed by the 15th International Conference of Labor Statisticians and include own-account (self-employed) workers, unpaid family workers, employers and employees working in formal and informal enterprises and households. See Hussmanns (2001) for the international definitions that were modified in this analysis to include agricultural workers, domestic service workers, and workers under the compulsory school-going age. See Gunatilaka (2008) for details of the definition criteria used in the Sri Lankan analysis.