Struggling to Survive: Sri Lanka's Poverty Line Surpasses the National Minimum Wage

The global economic downturn followed by the COVID-19 pandemic has brought unprecedented challenges to all economies, affecting millions of people worldwide, especially those living on lower incomes. Sri Lanka is no exception, particularly one of the worst scenarios in the world, with the country facing a severe economic crisis that has left many struggling to make ends meet. This economic turmoil has highlighted the need for a Social Safety Net (SSN) and measures to protect the most vulnerable segments of society. Recognizing the significance of this issue, as part of the bailout program also, the IMF has established a minimum requirement for SSN spending in Sri Lanka, with a floor of LKR 187 billion in 2023 (0.6% of GDP), this allocation aims to protect households from inflation and ensure the benefits of SSN net programs are not eroded.

National Minimum Wage Policy in Sri Lanka

Keeping SSNs aside, another critical tool to improve livelihoods for low-income earners is the minimum wage (MW) which is a relatively new concept in Sri Lankan context since the first National Minimum Wage (NMW) was introduced in 2016. A MW is a government-imposed legal minimum that employers must pay their workers for their labor. It ensures that workers are not exploited and receive a fair wage for the work they do. However, a significant step towards formalizing the MW policy in Sri Lanka, the NMW of Workers Act, No. 3 of 2016 was enacted by the Parliament on March 23, 2016, with effect from January 1, 2016.

A notable characteristic of wage distribution in Sri Lanka lies in the distinction between monthly and daily wage earners. These two groups exhibit distinct patterns, highlighting the necessity of addressing this dynamic to ensure the effectiveness of the MW policy in the Sri Lankan context. Recognizing this disparity, the NMW of Workers Act has established separate MWs for monthly and daily wage earners, with a monthly MW set at LKR 10,000 and a daily MW set at LKR 400.

Inflationary Pressures on NMW Policy

However, Sri Lanka's NMW policy is facing a significant challenge: inflation. The lack of annual adjustments to account for inflationary impacts has severely affected the real value of MWs. While the nominal value of the wages remains constant, the purchasing power of workers has significantly decreased, especially in recent months when Sri Lanka experienced high inflation rates. This loophole in the policy, deviating from common practice in other countries, has raised concerns about the effectiveness and fairness of the NMW. Although an amendment was made in 2021, increasing the monthly MW to LKR 12,500 and the daily MW to LKR 500, the absence of regular adjustments leaves wages vulnerable to inflation.

The Poverty Line Dilemma

As discussed above, a fundamental objective of a MW is to improve the living standards of individuals with low incomes. However, the crucial question arises: does the current MW in Sri Lanka adequately meet the basic needs of its workforce? In order for this policy to be truly effective, the MW must be sufficient to cover the essential expenses of individuals. Let's delve into whether the current MW in Sri Lanka aligns with this goal and truly uplifts the livelihoods of its people.

Unlocking the essentials: how much money do you need to meet basic needs? That is where the concept of poverty line is crucial, defining the threshold for economic hardship. The poverty line is a benchmark used to determine the minimum income required for individuals or households to meet their basic needs including food, shelter, healthcare, and education. In Sri Lanka, the Department of Census and Statistics (DCS) recently redefined the Official Poverty Line (OPL) at the national level to be Rs. 13,777 as of December 2022. Shockingly, this is higher than the monthly MW. This implies that the people who earn the monthly income of MW fall into the poor.

The average family size in Sri Lanka, as reported by the 2022 Annual Report of the Central Bank, stands at 3.7 persons. To escape the clutches of poverty, the average family would require a minimum income of Rs. 50,974. However, without specific data on the employment status of each family member, the challenge becomes evident. In fact, to lift a family out of poverty, at least 4.07 individuals would need to earn the exact MW. In practical terms, even if both parents earn Rs. 12,500 per month each, it would still push the family into the depths of extreme poverty, illustrating the grim reality of extreme poverty.

Up to this point, we focused only on the monthly MW. However, a more comprehensive examination reveals an even grimmer scenario when considering the daily MW. The revision of global poverty lines by the World Bank in September 2022 has brought to the forefront the harsh realities faced by low-income individuals in Sri Lanka. The updated threshold of $2.15 per person per day, surpassing the previous poverty line of $1.90. Even when considering the highest exchange rate that Sri Lanka has ever experienced, the daily MW falls significantly below the World Bank's poverty line. Also, assuming a daily wage worker with an average of 22 working days per month, their monthly earnings amount to a meager Rs. 11,000, which is well below the OPL.

Informal Employment: The Barrier to Fair Minimum Wages in Sri Lanka

Also, Sri Lanka faces a major hurdle in implementing effective MW policies due to its extensive informal sector employment. The informal sector encompasses unregulated economic activities, marked by low productivity, absence of formal contracts, and limited social security benefits. In 2021 alone, almost 58% of Sri Lanka's total employment fell under the informal sector. While the figure is decreased over the past years, the sizable portion of informal employment in Sri Lanka remains a concern. This staggering statistic is comprised of 62% of male workers and 50% of female workers, highlighting the significant presence of informal employment in the country.

One of the main issues is the limited enforcement capacity of governments in the informal sector. Due to its unregulated nature, monitoring and enforcing MW laws become arduous tasks. Employers in the informal sector often pay their workers less than the mandated MW, taking advantage of the lack of oversight and weak legal protections. As a result, workers in this sector, who are already vulnerable, continue to face exploitative working conditions and inadequate compensation. Furthermore, the informal sector is typically characterized by a large number of small businesses and self-employed individuals. These entities often operate on tight profit margins, and an increase in the MW may impose additional financial burdens on them. Another challenge is the informal sector's interconnectedness with the formal sector. Many businesses operate in both sectors simultaneously, allowing them to circumvent MW regulations. For instance, a company might register its core activities in the formal sector while subcontracting low-paid work to informal businesses or individuals. This practice undermines the intended impact of MW policies and perpetuates the cycle of exploitation and inequality.

However, to address the challenges associated with the country's MW policy, two key concerns need to be addressed. Firstly, the NMW of Workers Act should be amended to ensure annual adjustments aligned with inflation rates. By linking MW to the economic reality, workers will be assured of fair compensation that aligns with the country's changing economic landscape. Such adjustments will help maintain the purchasing power of wages and improve the standard of living for low-income earners. Secondly, concerted efforts should be made to transition workers from the informal sector to the formal sector, thereby enforcing compliance with MW regulations. This can be achieved through various strategies including, simplified formalization processes, expanding access to financial support, improving skill development and training, and increasing awareness and education. Additionally,  robust enforcement mechanisms are essential to ensure compliance with MW policies. Strengthening labor inspection systems and increasing the number of inspectors can help monitor compliance and address violations.

By addressing these concerns, Sri Lanka can strive towards more effective MW policies that support the well-being of low-income workers, reduce inequality, and contribute to sustainable economic development.