Unemployment in Sri Lanka - Explanations, Constraints and Prospects for the Future

Sammanfattning: Sri Lanka has experienced a double-digit unemployment rate for almost three decades. The problem of the country is that there exists a mismatch between the demand for and the supply of the educated labour force, which is reflected in youth unemployment. The aim of the thesis is to explain this mismatch. We use the theories of unemployment, the labour market and human capital applicable to developing countries. The analysis embraces how the labour market, the households and the governmental policies are influencing one another in the economy in relation to the problem of unemployment. The main problem is not that there is a lack of jobs; it is rather that there is a large gap between the “good” and the “bad” ones. This leads to a queuing behaviour where the educated stay unemployed rather than taking a job that is below their preferences. There is also a weak linkage between the educational system and the labour market, meaning that the schools and training institutes does not produce the skills needed in the industry. Another explanation to the unemployment problem is that stringent labour market regulations discourage job creation. We believe that the relatively high educational level does not contribute to higher productivity of the people, as long as the country is trapped in labour-intensive, low-value production structure.