Introduction In March 2024, Sri Lanka's cabinet approved a 40% hike to the national minimum wage to support those in poverty. The debate over minimum wage is ongoing, with concerns that increases might reduce employment, while others emphasize the positive impact on the living standards of the poor. However, most economic studies show that minimum wages have little to no effect on employment. The International Labour Organization (ILO) notes that appropriately set minimum wages can reduce inequality and benefit the poor, depending on the country-specific economic situation. For a minimum wage to effectively address inequality and uplift those in need, it must have broad coverage and compliance, be set at a level that considers workers' needs and the country's economic conditions, and target those at the lower end of the income distribution. Minimum Wage Compliance and Challenges in Informal Employment In many developing countries, wage workers earning less than the minimum wage are either not legally covered or face non-compliance issues. In Sri Lanka, all employees across industries are legally protected under the National Minimum Wage of Workers Act, No. 3 of 2016, which prohibits employers from paying below the national minimum wage. Despite this, some workers still earn less due to high levels of non-compliance, as over 60% of employment in Sri Lanka is informal. The 2016 Act set the minimum wage at LKR 400 ($1.34) per day for daily workers and LKR 10,000 ($33.44) per month for monthly workers. In 2021, these amounts were increased to LKR 500 ($1.67) per day and LKR 12,500 ($41.80) per month. However, 2022 Labor Force Survey (LFS) data shows that many workers still earned below the minimum wage, especially in informal employment—approximately 97% of daily wage workers and 80% of monthly wage workers. These informal workers are not protected by legal and regulatory frameworks, leading to pay below the minimum wage and poor working conditions. A minimum wage hike in Sri Lanka risks being ineffective unless accompanied by efforts to encourage formalization. Alarmingly, even some formal workers earn below the minimum wage. In managerial, professional, and clerical jobs, formal workers are more common than informal ones. In contrast, informal workers dominate roles like technicians, service and sales, agriculture, craft, machine operation, and elementary work. These findings underscore the need for effective measures to ensure compliance with the recent minimum wage increase. Figure 1: Formal and Informal Workers Earning Below Minimum Wage in Their Primary Jobs Source: Department of Census and Statistics. 2022. Labor Force Survey. Effectiveness of Minimum Wage Adjustments The effectiveness of the minimum wage hinges on how it's set. The ILO warns that minimum wages below half the median wage leave many workers underpaid, as seen in Sri Lanka in 2022. The proposed 40% increase to LKR 12,500 ($41.80) is a positive step, bringing it slightly above half the median wage—LKR 32,000 ($106.99). Further increasing it toward the median wage is unrealistic, as it would affect half of all workers and likely lead to job losses and non-compliance. However, these effects can only be analyzed precisely with the 2024 Labor Force Survey data, which isn't yet available. In Sri Lanka, the minimum wage has been ineffective due to infrequent adjustments, leading to stagnant nominal wages. Globally, 114 out of 153 countries saw real growth in minimum wages between 2010 and 2019, but Sri Lanka’s real minimum wage has declined since 2016. By the end of 2022, the minimum wage was too low, worsened by the economic crisis, which drove up poverty and inflation. The government's decision to raise the minimum wage to match the poverty line by March 2024 is crucial, as it had fallen below this line since July 2022. However, to ensure the minimum wage remains effective, timely future adjustments are essential. Figure 2: Nominal and Real Minimum Wages from 2016 to Present Note: Inflation is adjusted based on the year 2013. As of April and May 2024, the proposed minimum wage hike has been announced but has not yet taken effect.Source: Department of Census and Statistics. Monthly Price Data (From January 2016 to May 2024) and National Poverty Line (From January 2022 to May 2024). Minimum Wage Effects on Low-Income Workers and Demographic Disparities Assessing whether workers earning less than the minimum wage belong to poorer households or better-off families is crucial. In Sri Lanka, the majority of workers (80% of daily and 68% of monthly earners) who earn below the minimum wage and work over 40 hours per week come from families with incomes below the median. This indicates that the minimum wage is effectively targeting lower-wage workers, showing potential to reduce inequality. These workers are primarily in elementary occupations, with significant numbers among machine operators, service and sales workers, and craft workers. Many have temporary or casual contracts, and some lack a permanent employer. Most are employed in the services and industry sectors, while those in agriculture who earn less are often self-employed in the informal economy or work as unpaid family laborers. An effective minimum wage can also help close gaps between demographic groups if properly targeted. Most workers earning below the minimum wage and working over 40 hours per week are from non-urban areas (rural and estate), have education below A/Levels, and are over 30 years old, suggesting they likely have families to support. Although the share of women is lower than that of men due to higher male labor force participation, the proportion of women earning below the minimum wage relative to their total workforce is higher than that of men. Therefore, the minimum wage in Sri Lanka seems well-targeted to reduce disparities between different groups. Figure 3: Demographic and Labor Characteristics of Workers Earning Below the Minimum Wage and Working Over 40 Hours Weekly in Their Primary Job Source: Department of Census and Statistics. 2022. Labor Force Survey. Implications Since Sri Lanka’s minimum wage act legally covers all employees and effectively targets beneficiaries to reduce inequality and support the poor, the next steps should focus on promoting compliance and reducing high levels of informal employment. This includes creating opportunities to enhance worker productivity and increase wage employment. Additionally, regular and timely adjustments to the minimum wage are essential, based on a balanced, evidence-based approach involving all social partners: employees, employers, and socio-economic advisors. These adjustments should reflect changes in the cost of living and other economic conditions. The minimum wage must strike a balance: it should be set high enough to cover basic living expenses—such as food, clothing, childcare, housing, health insurance, and transportation—without adversely affecting employment. If the wage is too low, many workers will struggle to maintain decent living standards. Therefore, discussions on minimum wage rates should be based on robust, country-specific evidence that considers workers' needs, family requirements, and national economic factors like productivity, prices, and employers' ability to maintain employment. Ask the Experts Nilupulee Rathnayake Senior Research Professional, Centre for Poverty Analysis, Sri Lanka Nilupulee Rathnayake is a Senior Research Professional at the Centre for Poverty Analysis (CEPA) in Colombo, specializing in livelihoods and employment. She holds an MSc in Development Economics from the University of Nottingham, United Kingdom. Her research mainly focuses on gender disparities and labor market dynamics. Follow Nilupulee Rathnayake on Leave your question or comment in the section below: View the discussion thread.