In Sri Lanka, the mainstream discourse on job security, salary hikes, and skilled labour is considerably limited to the private and public sectors, or the formal sector. Employment related policies, plans, and laws also prioritise the formal sector.
However, the majority of Sri Lanka’s labour force does not belong to the formal sector. Informal sector workers, who do not receive protection and recognition as the formal sector, drive most domestic economic activities. Despite being an essential segment of the labour force, the economy, and business activities, they are yet to receive the recognition that they deserve. Given their contribution to the economy, this is a national concern.
Informal sector
The informal sector, also commonly known as the informal economy, unregulated sector, or grey economy, among other names, refers to economic activities that have not been regulated or adequately regulated by formal arrangements including laws, policies, and recognised standards.
Workers of this sector have little to no job security, and employers do not provide or contribute to retirement plans. Wages and other perks as well as working conditions are not regulated by existing laws because informal sector workplaces are not registered companies. What is more, formal agreements or contracts are not sought or provided, and almost all informal sector jobs depend on verbally agreed conditions. At the same time, workers of this sector are provided with little to no safety measures or complaint related mechanisms.
“Beyond a high incidence of poverty, informal economies are also characterised by severe decent work-related deficits. Low quality employment, inadequate social protection, poor governance, and low productivity are some of the obstacles that workers and enterprises face when caught in the informality trap. Without formalisation, decent work for all and equity in society will remain an illusion,” the International Labour Organisation (ILO) said regarding the nature of this sector, adding that the formalisation of this sector is a complex and long-term process that requires a combination of interventions on laws and regulations.
However, despite these issues and inadequacies, the informal sector constitutes a large share of global employment, production, and involvement in a plethora of other activities that support economic activities. According to the ILO, more than half of the world’s labour force is engaged in informal work, while the International Monetary Fund’s (IMF) assessment is that 60% of all workers are involved in unregulated jobs.
SL’s informal economy
According to the IMF, informal employment contributed to two-thirds of total employment in Sri Lanka, and in 2019, about 5.5 million (67%) of the total of 8.2 million employed in the country were considered informal.
“These workers are neither subject to national labour legislations and income tax nor entitled to social protection and employment benefits. They are not registered with the Inland Revenue Department (IRD) and the Employees Provident Fund (EPF), and do not have formal financial accounts. An important feature of informal employment in Sri Lanka is that a significant share of workers (0.8 million, 9% of the total employment or 22% of the formal sector employment) have informal contractual relationships while working in formal enterprises. They work in the formal sector but without contribution to social security programs,” the IMF noted.
According to the IMF, informal employment in Sri Lanka is concentrated in the primary and trade sectors, and has remained consistently so for the past two decades. Sectors with the highest share of informal employment include agriculture, forestry, and fisheries sectors, followed by craft and related trade sectors such as construction, mining, textiles, and elementary occupations such as street vendors, domestic workers, and daily wage earners. Informal employment has stayed around 70% during the 2000-2017 period, broadly comparable to the world average in emerging and developing economies, but lower than the South Asian average of 79%.
The high rate of informality has long been attributed to the stringency of labour laws in Sri Lanka. According to a World Bank (WB) report about Sri Lanka’s informal sector, the Termination of the Employment of Workmen (Special Provisions) Act in particular, which makes dismissing employees difficult and expensive, has been at the centre of the debate. The report said that it has been argued that the said Act 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.
Discussing the pros and cons of formalisation, the aforementioned WB report explained that in some cases, informal employment arrangements may also be preferable from the worker’s perspective: “Social insurance benefits that typically come with a formal job include health insurance, pensions, and unemployment benefits. But, in Sri Lanka, health insurance coverage is universal and does not depend on the employment status, so this coverage is unlikely to be an incentive. There is also no formal unemployment insurance scheme in Sri Lanka, which makes unemployment untenable for many. The Workmen’s Compensation Ordinance applies only to public servants (excluding the Armed Forces and the Police). Instead, informal employment increases the current net take home pay, which is preferred by many workers over any benefits. At the same time, while many informal jobs can be considered subsistence jobs, given the lack of job security and the low level of compensation, they still represent a viable alternative to unemployment. This is especially true during recessions or in contexts where there are few good jobs and otherwise no formal income support scheme, and where violations of minimum wage regulations are widespread. From the firm’s perspective, informal labour provides flexibility and reduced labour costs.”
Informal sector in the larger economy
According to the University of Colombo’s Sociology Professor Siri Hettige, the limited or inadequate expansion of Sri Lanka’s formal sector is one of the reasons that have contributed to the expansion of the informal sector. He explained: “The informal sector has remained quite significant because it has continued to accommodate a large part of the labour force. This is because, unlike in fast developing countries, both private and public sectors in Sri Lanka, which represent the formal sector, have not expanded adequately. While the public sector cannot expand considerably, the private sector has also not expanded as expected.”
He added that although one would have expected the private sector to attract more workers as it expands, in reality, it has not happened as expected. What has happened is that temporary jobs of an informal nature have been created in the private sector, which Prof. Hettige said may have contributed to the inadequate expansion of the formal sector. At the same time, Sri Lanka’s private sector being more service-oriented than production-oriented is a concern, according to Prof. Hettige, who explained that a production oriented private sector would have produced more permanent, formal jobs. “The problem is very serious,” he stressed, adding that informal sector workers not being entitled to adequate job security and social security is a social issue, not just an economic issue. According to him, in the long run, informal sector workers having to rely on their income and the ability to work creates a plethora of other issues, including an increased burden to the economy, that have an impact on the overall socio-economic situation. “In Sri Lanka, we have not restructured the economy to ensure that the labour force has secure employment and access to various social protection measures as in other countries,” Prof. Hettige said, opining that the informal sector has to be reduced to the minimum.
Recent developments
In the context of the economic crisis, the overall discourse on job security and social security for informal sector workers has received more attention, and the authorities have paid attention to absorbing informal sector workers into the formal sector, or making their jobs more formal, in order to improve job security and to regulate the relevant fields and jobs.
There are plans to include informal sector workers in the EPF and Employees Trust Fund schemes, and to introduce a wide social security scheme for informal sector workers. Citing former Labour and Foreign Employment Minister Manusha Nanayakkara, the media earlier reported that these plans come in the context of the ongoing labour law reforms, which seek to unify existing labour laws and adopt new measures to improve labour force participation through a law called the Employment Act.
“The Act will introduce a National Remuneration Council for the determination of the minimum wage. This Council will seek to modernise the existing system of minimum wages determined by Wages Board decisions that incorporate collective bargaining and has been criticised for increasing labour costs, impeding employment growth, and the shifting of jobs to the informal sector,” an IMF report said in this regard, adding that encouraging the formalisation of informal firms is an important structural reform.
Recently, a programme called ‘Garu Saru’ was announced, which, according to the Government, will improve the professional status, job and societal security, and well-being of the entire workforce, including those in the informal sector who have not received proper recognition.
According to Nanayakkara, as part of the ongoing programmes, the informal sector labour force will be organised in a systematic manner, and national level bodies will be set up with a focus on their occupations in order to decide on employment conditions and terms applicable to them. Local media outlets quoted Nanayakkara as saying that the Government acknowledges the importance of a comprehensive social security system as outlined in the ILO Convention 102, and that the Government is developing a comprehensive social security policy in collaboration with the ILO.
According to Prof. Hettige, while the plans to include informal sector workers in the formal sector or provide informal sector workers with job and social security schemes that exist in the formal sector are important, and could resolve several key issues faced by informal sector workers, it is not something that could be achieved only through legal or policy reforms. Noting that the nature, role, and contribution of the informal sector in the larger economy is diverse and complex, he pointed out that ensuring job and social security of informal sector workers requires socio-economic reforms as well. “It is not impossible. But, it is easier said than done,” he opined, explaining that although there were plans to introduce pension schemes for certain informal sector groups several years ago, they did not materialise successfully.
Workers, trade unions, and activists representing the informal sector have responded to these plans and proposals. While they welcome decisions aimed at improving the wages, other perks, job and social security, the recognition, and the skills of informal sector workers, they remain sceptical about the implementation of these plans. Pointing out that similar plans presented in the past have not materialised, they propose that the Government should present plans designed specifically for informal sector workers in accordance with international standards.
(This story was produced with support from Internews Sri Lanka)