Reversing Sri Lanka’s Decline in Labour Productivity and Employment Growth
Sri Lanka’s economic fabric is undergoing a significant transformation, but not in the direction that promises prosperity. The period from 2019 to 2023 has been marked by a troubling convergence of crises that have eroded not only employment levels but also the quality and productivity of labour across key sectors. From agriculture and manufacturing to services and tourism, a broad productivity slowdown now poses a real threat to the country’s long-term economic resilience and competitiveness.
The link between employment, productivity, and wages is central to understanding the country’s labour market health. Ideally, when employment expands in step with output growth, both productivity and wages can rise. But when job creation outpaces output, especially in low-value roles, labour becomes less efficient, wage growth stalls, and the economy becomes increasingly vulnerable. This imbalance is now visible in Sri Lanka across sectors, with each showing its own worrying trends.
The agriculture sector, which employs over a quarter of the labour force, saw productivity shrink by an annual average of 0.6 percent between 2019 and 2023, despite modest employment growth. This indicates a troubling inefficiency: more workers producing less output per person. The decline is largely tied to the hasty shift to organic farming in 2021, which disrupted inputs and lowered yields. If left unaddressed, this trend not only threatens rural incomes but also undermines national food security.
The industry sector, including manufacturing and construction, has fared no better. It recorded an average annual productivity decline of 3.9 percent while employment shrank by 1.8 percent. The drop is especially severe in construction and utilities, with productivity falling by a staggering 7.3 percent annually. This was driven by pandemic lockdowns, shrinking export demand, and, more recently, the collapse of infrastructure activity amid fiscal tightening. Manufacturing, particularly in apparel and leather, showed only marginal productivity declines but remains vulnerable to shifting global supply chains and rising input costs.
In contrast, the services sector, Sri Lanka’s largest GDP contributor, managed to maintain relative stability. Despite an overall productivity dip of 0.5 percent, the sector expanded its workforce by 0.8 percent annually, preserving some balance. Certain sub-sectors like wholesale and retail trade, transport and storage, education, and public administration showed positive productivity growth. However, the accommodation and food services sub-sector painted a different picture: while employment grew by 3.5 percent annually, productivity dropped by 3 percent, highlighting a potential over-hiring trend in a sector still rebounding from collapse.
To arrest and reverse these trends, Sri Lanka must now make productivity enhancement a national economic priority. Without strategic correction, the country risks locking itself into a low-efficiency, low-wage equilibrium.
Strategic Directions for Recovery and Growth
1. Rebuild Agricultural Productivity through Smart Modernisation
Agricultural recovery must begin with correcting the missteps of the fertiliser policy. Rather than banning chemical inputs overnight, Sri Lanka should adopt an integrated farming approach, balancing organic methods with science-backed fertiliser use. Extension services should be strengthened to educate farmers on sustainable practices, while investment in irrigation, mechanisation, and post-harvest storage can reduce waste and boost output. Encouraging agro-processing can also add value and create higher-productivity jobs in rural areas.
2. Revitalise Manufacturing through Targeted Industrial Policy
The manufacturing sector needs focused support to stabilise supply chains and offset input costs. This includes reducing import bottlenecks for essential raw materials, supporting energy reliability for factories, and facilitating access to affordable credit. High-potential sub-sectors like electronics assembly, pharmaceutical manufacturing, and agri-based industries should be developed through public-private partnerships, export promotion, and tax incentives. Additionally, investment in automation and digital tools can improve both productivity and product quality.
3. Restructure the Construction Sector for Resilience
Given its massive productivity losses, the construction industry requires a complete overhaul. Future public investment should prioritise climate-resilient, labour-intensive infrastructure that contributes to long-term growth. Construction standards and regulatory processes should be streamlined to lower costs. Simultaneously, training programs should upskill construction workers in green building, digital project management, and safety compliance to increase sectoral efficiency.
4. Enable a Service Sector Shift from Volume to Value
Sri Lanka’s service sector has shown relative strength, but must now pivot from labour expansion to value creation. Tourism and hospitality should focus on premium, sustainable experiences rather than low-margin mass tourism. Encouraging formalisation and digitalisation in retail, logistics, and finance can improve both transparency and efficiency. Additionally, education and public administration sectors that saw positive productivity gains can be further enhanced through digital governance and AI integration.
5. Leverage Technology and Skills to Unlock Labour Potential
Investing in people is the single most sustainable path to productivity. Sri Lanka must build a national reskilling strategy that aligns vocational training and higher education with industry needs. Priority should be given to digital literacy, green economy skills, and language proficiency for global competitiveness. Online platforms, apprenticeships, and certification programs can increase access for women, youth, and rural populations. Bridging the skills gap will also reduce underemployment, which silently undermines productivity.
6. Implement Labour Market Reforms that Promote Efficiency
Labour regulations must evolve to allow for greater flexibility while protecting worker rights. Formalising informal jobs, enforcing fair wage laws, and digitising job matching platforms can increase transparency and efficiency. Productivity-linked incentive schemes, particularly for SMEs, could motivate performance improvements. Furthermore, reliable labour market data is essential to monitor progress and guide adaptive policymaking.
7. Promote Sectoral Dialogue and Public-Private Coordination
Reviving productivity is not the job of government alone. A coordinated approach involving employers, unions, investors, and academia is needed to drive sector-specific solutions. Sectoral productivity councils could be formed to identify bottlenecks, design strategies, and track progress. International development partners can be engaged not just for funding, but for technical expertise, policy benchmarking, and innovation exchange.
The stark message from the data is clear: employment alone is no longer a sufficient indicator of economic well-being. Productivity, how effectively each job contributes to output, must now take centre stage in Sri Lanka’s policy dialogue. The country has the human capital and institutional foundation to pivot toward a more efficient and inclusive economy. But without deliberate strategy and coordinated action, the current trajectory will only deepen wage stagnation, investor uncertainty, and development delays.
It is time to shift the focus from job quantity to job quality. Rebuilding productivity is not just an economic necessity, it is a national imperative.
