Sri Lanka's demographic transitionhas significantly shaped the age distribution of the laborforce and created a large working age population (World Bank2008). Changing cohort sizes of young and old workers notonly affect their own labor market outcomes (job quality,earnings), but also potentially affect growth prospects inthe economy. Recovering from a 30-year conflict in the Northand the East, Sri Lanka aims to accelerate growth in themedium term by substantially increasing investments. Whatwill be the role of the labor market in delivering thisgrowth? The service sector is expanding and accounts fornearly 60 percent of the Growth Domestic Product (GDP) andalmost 40 percent of employment. However, only 56 percent ofthe working age population is employed, a result of lowparticipation and high unemployment rates among women andyouth. Any growth strategy will have to bring in moreworking age people, particularly women, into economicactivity. The paper is organized as follows. The twosections that follow present an overview of the supply anddemand side of the labor market. The next section discussesthe ways in which the demographic transition could shape thelabor market, particularly in terms of unemployment andearnings. This discussion is followed by three sectionsexamining labor force participation and unemployment, jobtype, and earnings respectively. The last section concludeswith some policy recommendations.
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