Rising Labour Market Inactivity in Post-Crisis Sri Lanka

While Sri Lanka’s recent crises, economic, political, and health-related, have received significant public attention, a more subtle yet equally troubling issue has emerged beneath the surface of official statistics: a silent surge in labour market inactivity. Between 2019 and 2023, the country did not experience the explosive growth in unemployment that many had feared. Instead, it witnessed a more insidious trend, a withdrawal of workers from the labour market altogether.

This growing labour market inactivity presents a quiet but serious challenge for Sri Lanka’s economic recovery. According to the most recent data, the employment-to-population ratio (EPR), which captures the proportion of the working-age population that is employed, dropped from 49.5 percent in 2018 to just 45.1 percent by the fourth quarter of 2023. While the headline unemployment rate improved, declining from a pandemic peak of 5.5 percent in 2020 to 4.3 percent by the end of 2023, this apparent improvement masks a deeper structural problem: more people have simply stopped looking for work.

This decline in labour force participation is not just a number. It reflects individuals, especially youth and low-skilled workers, falling through the cracks of the economic system. These individuals are not counted in unemployment statistics because they are no longer actively seeking jobs. Some have dropped out due to disillusionment, others due to delayed education pathways, skill mismatches, or a lack of confidence in re-entering a fragile and unpredictable job market.

Sector-specific challenges have fueled this retreat. The agriculture sector, traditionally a safety net during crises, was shaken by the abrupt chemical fertiliser ban in 2021, reducing yields and discouraging labour demand. The industrial sector, particularly manufacturing and textiles, was hit hard by both pandemic-related supply chain disruptions and the economic crisis that followed. Meanwhile, the services sector, the backbone of Sri Lanka’s GDP, suffered uneven blows. Retail and tourism collapsed during the pandemic, and financial services felt the brunt of the 2022 economic turmoil.

Amid these sectoral setbacks, the resilience of the workforce has been stretched thin. Workers without up-to-date skills or access to retraining found themselves edged out of a tightening job market. Many younger people, whose educational journeys were derailed by school closures and exam delays during the pandemic, now face delayed entry into the workforce. As a result, rather than being unemployed, they remain inactive, neither working nor studying.

This distinction is crucial. Unlike unemployment, which signals active job seeking, inactivity indicates disconnection. And disconnection, over time, can become permanent. For a country already facing demographic shifts and slow job growth, this trend threatens to undermine long-term productivity, innovation, and inclusive economic development.

Addressing this requires a new policy lens. It is no longer sufficient to focus on job creation alone, Sri Lanka must focus on labour market reactivation. First, education and training systems must be recalibrated to align with the emerging needs of the economy. Flexible, modular vocational programs can allow young people and displaced workers to upskill or reskill quickly. Digital learning tools should be scaled up, especially in rural areas, to close the skills gap without requiring long-term educational detours.

Second, there must be targeted interventions for groups most at risk of inactivity, especially youth, women, and informal sector workers. This includes expanding access to childcare and eldercare services to support women’s participation, and introducing incentive schemes for businesses that hire and train young workers or long-term inactive individuals.

Third, labour market information systems need urgent reform. A data-rich approach to policymaking will allow for better identification of where inactivity is rising, which skills are lacking, and which industries are in need of human capital. Improved tracking will also help international donors and local governments align resources to the most pressing needs.

Finally, mental health and social support systems must not be ignored. The psychological toll of prolonged inactivity and repeated economic shocks has left many workers feeling hopeless. Rebuilding their confidence is as important as providing them with technical skills.

Sri Lanka is now at a critical inflection point. The resilience of its people is undeniable, but resilience alone is not a strategy. Rising labour market inactivity is a silent crisis that demands a loud and coordinated response. By focusing on reactivation, retraining, and reform, the country can not only lift participation rates but also unlock the human potential that lies dormant in a sidelined generation.

Without such action, the risk is not just a weak labour market, it is a workforce permanently left behind.