Determination of Wage Rate in the Labour Market in Sri Lanka

C. L. K. Nawarathna


Wage/ Salary is the main income source of a majority of employed population inSri Lanka. However their wage is a function of a number of inputs such as age, sex,education and experience.Literature reveals that human capital accumulation is animportant determinant of individual‟s earnings capacity and employment prospects, andtherefore, plays an important role in determining the travel and distribution of income insociety. Hence, it is important to identify how far the education of employees hasdetermined wage rate. Labor market experience also plays a significant role in wagedetermination of employees.

Labor force in Sri Lanka is employed in different professions or occupations invarious sectors or industries. Salaries or wages of these employees differ vertically aswell as horizontally. The causes for different ials are explained under the theoryof wage determination. However, in order to understand this problem in the contextof a country, an empirical study is needed. Therefore, this study focused oninvestigating how the wage rate of employees is determined in the Sri Lanka labormarket. The internationally recognized classical human capital earning function whichwas introduced by Jacob Mincer highlights the significance of education and experiencein wage determination.

In order to study the wage determination, a sample was selected from the SriLanka labor force survey conducted by the Department of Census and Statistics. Thedispersion of conditional wage rate of the total sample, and the sub-samples areinvestigated by running quintile regressions of Mincerian wage equation with a view toaddressing the link between schooling and rate of return to education and wageinequality.

In the Sri Lanka labor market, level of education is the most significant factorfor wage determination and the substitutability of experience for education is low. Inaddition, the rate of return to education increases over the wage distribution in anoverwhelming majority of wage groups.

Key words: Wage Determination, Human capital, Level of education, Experience,Mincer model

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