Using a countrywide sample survey of enterprises, this study finds empirical evidence that the manufacturing sector in Sri Lanka is facing a serious labor shortage problem. Extent of labor shortage is measured in terms of presence of unfilled vacancies, longevity of vacancies and relative size of unfilled vacancies. This study explores locational variation and firm level variation of labor shortage and found that firm level variation is much wider than locational variation. While locational characteristics explain only 7 to 15 percent of the variation of labor shortage, firm characteristics explain 18 to 27 percent of the variation of labor shortage. Among locational characteristics, firms located in Western province showed greater extend of labor shortage. Among firm characteristics - labor turnover rate, exporting firms and firms with innovative product were more important in explaining the variation of labor shortage. These three variables alone explain over 10 percent of the variation of the extent of labor shortage. High incidence of labor shortage was observed with very high youth unemployment, lower labor force participation and very high labor turnover rates. Among the policies recommended to overcome labor shortage problem, shifting firms to provinces with high youth unemployment rates, measures to increase labor retention rates and policies to increase labor force participation rates are important. Macro policies to encourage shifting of firms to remote provinces is needed for sustainability of such efforts.