Unemployment up at 5.2% in 2Q; labour force participation slips

•  Sri Lanka faces job losses and stagnant job market amid economic challenges
• Decline in labour force participation to 48.6% remains a major concern, indicating a lack of job opportunities
• In contrast, developed economies have labour force participation rates above 60%

Sri Lanka may need additional policy support and favourable economic environment to create more job opportunities
Sri Lankans continued to lose jobs through the second quarter while the people continued to stay on the sidelines of the job markets in a troubling sign for the economy which is scrambling to find some balance amid higher taxes, higher rates and repeated energy and utility price shocks.

The official jobless rate came in at 5.2 percent in the second quarter of 2023, which was above 4.7 percent in both the first quarter and for the entirety of last year, indicating persistent job losses amid continuous shrinking of the economy since the beginning of 2022.

However, the situation was expected to have bottomed out in the second quarter, as authorities anticipated mild growth in the third and fourth quarters following projections that the economy would exit the persistent contraction by the third quarter.
The Sri Lankan economy contracted by 7.9 percent in the first half of 2023, following a decline of 7.8 percent in 2022, marking the deepest contraction in the country’s post-independence history. 

However, the rate of contraction has slowed down in recent times, with the second-quarter economic growth recording a negative 3.1 percent, which is significantly lower than the 11.5 percent de-growth observed in the first quarter.
The Central Bank has up to this point implemented policy rate cuts totaling 550 basis points since June of this year, including the most recent one last week. 

This move signifies a shift away from the ultra-tight monetary policy stance that was initiated in April of the previous year. The objective was to stimulate credit flows to the economy, aiming to boost both investment and consumption activity.
Despite the rate cuts, the growth in private credit has remained modest through August. However, officials anticipate an acceleration in credit in the coming months, specially starting from next year. 

This expected increase in credit is anticipated to provide stimulus to the economy, ultimately leading to the regeneration of jobs lost in the preceding years.
What further concerns the officials is the decline in the labour force participation rate, which represents the percentage of people who are either employed or actively seeking employment, as a proportion of the total working-age population. 
It dropped to 48.6 percent in 2Q from 49.9 percent in the first quarter and 49.8 percent in 2022.

The low participation rate in an economy that is struggling to regain stability after a tumultuous year is one of the most pressing concerns. 
It suggests that people are refraining from entering the labour force, primarily because of the lack of opportunities, and to some extent, their reluctance to engage in meaningful employment.

Labour force participation rate stands above 60 percent in developed economies as more people are re-entering the workforce as the pandemic era support schemes ran out and the incrase in inflation is taking a toll on their lifestyles forcing them back to the job market. The United States added 336,000 jobs in September, the highest monthly job gains since January this year, reflecting the still resilient job market in the face of the fastest pace of interest rate hikes by the US Fed to slow the economy down to tame inflation. 

Sri Lanka will need to take additional measures in terms of policy support and create a more favourable economic environment domestically to generate greater job opportunities. This in turn can serve as an incentive for those who have left the country in search of employment to consider staying back.