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The Sri Lankan unemployment problem revisited

  • Rama, Martin

Sri Lanka's high unemployment rate has been attributed to a mismatch of skills, to queuing for public sector jobs, and to stringent job security regulations. But the empirical evidence supporting these explanations is weak. The author takes a fresh look at the country's unemployment problem, using individual records from the 1995 Labor Force Survey and time series for wages in the economy's formal and informal sectors. He assesses, and rejects, the skills mismatch hypothesis by comparing the impact of educational attainment on the actual wages of those who have a job with the effect on the lowest acceptable wages of the unemployed. However, he finds substantial rents associated with jobs in the public sector and in private sector activities protected by high tariffs or covered by job security regulations. A time-series analysis of the impact of unemployment on wage increases across sectors supports the hypothesis that most of the unemployed are waiting for"good"job openings but are not interested in readily available"bad"jobs. In short, unemployment in Sri Lanka is largely voluntary. The problem is not a shortage of jobs but the artificial gap between good and bad jobs. Policy efforts should be aimed at reducing the gap between good and bad jobs by making product markets more competitive, by reducing excessive job security, and by reforming government policies on pay and employment.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2227.

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Date of creation: 30 Nov 1999
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Handle: RePEc:wbk:wbrwps:2227
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  1. van der Gaag, Jacques & Vijverberg, Wim, 1988. "A Switching Regression Model for Wage Determinants in the Public and Private Sectors of a Developing Country," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 244-52, May.
  2. Mengistae, Taye, 1999. "Wage rates and job queues - does the public sector overpay in Ethiopia?," Policy Research Working Paper Series 2105, The World Bank.
  3. Rama, Martin & DEC, 1994. "Flexibility in Sri Lanka's labor market," Policy Research Working Paper Series 1262, The World Bank.
  4. William T. Dickens & Kevin Lang, 1991. "An Analysis of the Nature of Unemployment in Sri Lanka," NBER Working Papers 3777, National Bureau of Economic Research, Inc.
  5. Assaad, Ragui, 1997. "The Effects of Public Sector Hiring and Compensation Policies on the Egyptian Labor Market," World Bank Economic Review, World Bank Group, vol. 11(1), pages 85-118, January.
  6. Terrell, Katherine, 1993. "Public-private wage differentials in Haiti Do public servants earn a rent?," Journal of Development Economics, Elsevier, vol. 42(2), pages 293-314, December.
  7. Rama, Martin, 1998. "How Bad Is Unemployment in Tunisia? Assessing Labor Market Efficiency in a Developing Country," World Bank Research Observer, World Bank Group, vol. 13(1), pages 59-77, February.
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