Informal employment remains a salient and persistent feature of the Sri Lanka labor market, with around 70 percent of the work force informally employed. There are generally three reasons to be concerned about high informality: poverty, productivity and public finance. This report focuses on the poverty and vulnerability aspect of informal employment, by showing that informal jobs are more precarious in nature than formal jobs and are associated with inferior working conditions and lower earnings. The following three key messages emerge from the analysis. Message 1: The quality of informal jobs is much lower than that of formal jobs. Informal workers have more precarious employment arrangements and inferior working conditions. Their low earnings levels elevate the risk of poverty. The Sri Lanka labor force is segmented into three strands: (a) formal public sector workers who enjoy high remuneration, shorter work hours, many holidays, paid leave as well as other benefits, and overall job security; (b) formal private sector workers who make up a middle group, with access to social security and some paid leave but longer work hours and an earnings distribution that is closer to that of informal workers; and (c) informal workers, a group that includes informal employees as well as informal self-employed workers, most of whom are in precarious employment arrangements. Few informal workers have a permanent contract or access to benefits, and they tend to work excessively long hours. There exists a persistent earnings gap between formal and informal workers, even when comparing workers of similar characteristics. Moreover, the risk of extremely low pay and thus poverty is significantly higher for informal workers. Message 2: Stringent labor laws, along with the high cost of compliance and complexity of labor regulations, have encouraged informality. But formalization does not necessarily ease other constraints such as access to credit, reducing the incentive to formalize. The Termination of Employment of Workmen Act (TEWA), which regulates dismissal conditions and compensation, has been long criticized for making it difficult and expensive to dismiss employees. In fact, Sri Lanka has the second-highest redundancy cost in the world. Gratuity payments, contributions to the Employees' Provident Fund, Sri Lanka's social security scheme, and the Employees' Trust Fund, and generous paid leave and holidays add to the labor cost borne by the employer. Multiple and overlapping types of coverage for workers owing to different regulations create a complex operating environment for firms, making compliance costly. As a result, compliance tends to be incomplete, even for larger firms. Enforcement is generally weak due to manpower shortages in enforcing agencies, and the many lines of enforcement render the existing institutions inefficient and ineffective, while the labor dispute settlement system can lead to lengthy and costly processes. Moreover, there appear to be few benefits to formalization. The prevalence of the informal sect...