The Sri Lankan Unemployment Problem Revisited

The high unemployment rate of Sri Lanka has been attributed to skills mismatch, to queuing for public sector jobs, and to stringent job security regulations. However, the empirical evidence supporting these explanations is weak. This paper takes a fresh look at the unemployment problem using individual records from the 1995 Labor Force Survey and time series for wages in the formal and informal sectors of the economy. It assesses, and rejects, the skills mismatch hypothesis by comparing the impact of educational attainment on the actual wages of those who have a job and on the lowest acceptable wages of the unemployed. On the other hand, the paper 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 not interested in readily available “bad” jobs.