"Further the labour force is ageing. A young educated and growing labour force can stimulate economic growth. An older work force will be slower to innovate and adopt new technologies unless they are retrained constantly."
But Sri Lanka's labour force participation rates for women and youth were still "fairly low" the IPS said.
According to Sri Lanka's statistics office, the labour force participation rate has fallen from 50.3 percent in 2010 to 47.2 percent in the second quarter of 2012.
Male participation had fallen from 67.2 percent to 66.7 percent. Female participation in the labour force had fallen to 33.9 percent to 29.8 percent.
The IPS said a large number of people leave the country for foreign employment. The labour force had increased by 128,000 from 2010 to 2011, and the departures for foreign employment were 263,000 not adjusted for returnees.
According to the statistics office, Sri Lanka's employed population had risen slightly from 7.42 million in 2010 to 7.47 million in 2011. Unemployment had fallen to 4.0 percent by end 2011 to from 4.9 percent in 2010.A survey in the second quarter showed employed population at 7.12 million and employment at 3.8 percent.
"Though promoting foreign employment is attractive in terms of remittances, as labour resources become scarcer, policies for promoting foreign employment need to be re-evaluated," the IPS said.
While curbing the avenues to seek the best paying job for a citizen can be justified in terms of nationalism, or interventionist policy, analyst say reducing people's economic freedoms could not be condoned in a liberal sense.
Labour is the basic 'product' of a household and curtailing the freedom to sell or 'export' it to the highest bidder regardless of their geographical location can decrease the potential for individual human advancement.
Analysts say countries like China and Vietnam for example, which controlled economic freedoms of citizens through planning and state enterprise monopolies for decades, have suddenly prospered by expanding economic freedoms of citizens.
Economic freedoms of non-citizens have also been increased by allowing foreign direct investment and privatization.
They have started to catch up with more liberal states to regain their former positions they had in the feudal era before the establishment of private property rights and the restraint of sovereign rulers put Western Europe ahead of the rest of the world.
Higher wages can also automatically direct capital towards more labour productive industries and services, put labour intensive firms out of business and increase the demand for higher quality education as had happened in liberal states.