- Warns aimless formalisation can lead to higher poverty, unemployment, and crime
- Stringent labour laws have encouraged informality
- Reform focus should be on increasing productivity and jobs growth
- Calls for increase in flexibility in labour markets by reducing tax and simplifying compliance
By Shabiya Ali Ahlam
Despite achieving economic growth for the past 15 years, Sri Lanka’s high-level of informal employment of 70 percent remains a concern, according to the World Bank (WB).
The WB stressed that it is imperative to address the root causes and correlates of informality rather than strictly focusing on formalisation alone.
“Strategies that promote aimless formalisation can lead to higher poverty, unemployment, and crime levels,” the WB cautioned in its report titled ‘Informality, Job Quality, and Welfare in Sri Lanka’ launched recently.
The report pointed out that while its stringent labour laws, along with the high cost of compliance and complexity of labour regulations, that have encouraged informality, formalisation does not necessarily ease other constraints such as access to credit, reducing the incentive to formalise.
Highlighting that the quality of informal jobs is much lower than that of formal jobs, the WB said informal workers have more precarious employment arrangements and inferior working conditions. “Their low earnings levels elevate the risk of poverty,” the WB warned.
The development lender proposed that rather than reducing informality itself, the focus of reforms should be on increasing productivity and jobs growth. Required are regulatory reforms that aim to reduce the cost and increase the benefits of formality.
“A well-conceived formalisation strategy would aim at increasing the benefits and reducing the costs of formalisation through a policy mix that tackles the interrelated causes and consequences of informality together,” the WB stated, while stressing that reform packages should be implemented in an integrated manner rather than piecemeal way, which would also make the reforms politically and socially more acceptable.
In an effort to make formalisation more attractive, the WB suggested focus on several key areas.
The first is to increase flexibility in labour markets and quality of jobs by reducing labour taxes and simplifying compliance, which can be achieved by building an adequate and effective social protection system.
The WB also stressed the need to increase human capital to promote productivity gains, reduce the wage gap, and streamline regulations while strengthening monitoring.
Although attempts have been made previously to address this issue, efforts were not successful.
In response to long-standing challenges and complaints stemming from the multiplicity of laws regulating labour, a Unified Employment Law was approved by the Cabinet in June 2018. However, it failed to obtain final parliamentary approval.
The law aimed to consolidate the Shop and Office Act, the Wages Board Ordinance, the Maternity Benefits Ordinance, and the Employment of Women, Young Persons and Children Act into one labour law, without reducing any of the rights or benefits under the individual laws.
The WB reiterated that it is imperative for Sri Lanka to implement these reforms in a manner that is driven by the country’s demographic context, specifically the rapid aging combined with early retirement of the labour force.
“Reforms should attempt to make labour regulations compatible with the challenges posed by an aging labour force. The regulatory and incentive scheme needs to be restructured to encourage more working-age individuals to join the labour market and extend their working lives.
“This would help meet the labour demands in a country that still needs to grow significantly but is undergoing rapid aging,” the WB said.
It stressed that needed reforms include raising the formal retirement age, including harmonising the age for men and women, and structuring incentives to be consistent with the legislation.