The decline in productivity in the service sector leads to economic disparity—Philippine Development Research Institute warns

A significant challenge emerging in the Philippines’ economic growth is the stagnation of labor productivity in the service sector. According to a report released in December by the Philippine Institute for Development Studies(PIDS), it was revealed that the service sector, which contributes the most to gross domestic product and employment, is actually led by sub-sectors with low productivity and wages.

Numbers Indicate Structural Problems in the Service Industry

Latest data from the Philippine Statistics Authority highlight the severity of the issue. The expansion rate of the service sector in the third quarter was only 5.5%, falling short of the 6.3% recorded in the same period last year. More concerning is that low-productivity industries such as wholesale and retail trade, transportation and warehousing, and accommodation and food services account for 73.6% of total employment in the service industry.

These sectors are characterized by requiring only low to medium skills and offering wages below the average. PIDS points out that these structural issues are the fundamental barriers to balancing growth and equity.

Unequal Impact on Female Workers

Particularly affected are female workers. According to PIDS research, 68% of female workers are engaged in the service industry, with the majority concentrated in wholesale and retail trade and accommodation and food services. Since these are low-productivity sectors, they directly contribute to widening gender disparities.

The institute emphasizes that ensuring women benefit from productivity improvements is essential to addressing inequality.

Spillover Effects on the Overall Economy

Notably, improvements in productivity within the service sector have spillover effects on the entire economy. While not necessarily large employers, the service sectors with high forward linkages to manufacturing experience efficiency gains that promote growth in related industries. PIDS analyzes that strengthening productivity in these sub-sectors can generate positive chain reactions across the economy.

Need for Two-Tiered Measures at Corporate and Policy Levels

Enhancing productivity requires measures undertaken by individual companies. PIDS lists strategies such as management innovation, investment in research and development, workforce skill enhancement, and adoption of new technologies.

However, PIDS warns that individual efforts alone have limitations. To support sector-wide upgrades, broader structural reforms are necessary. A strategic framework integrating key policy areas—labor markets, enterprise and industry development, technological innovation, and institutional reform—is crucial to maximize the effectiveness of public interventions.

Policy Design Using Transformation Theory

PIDS recommends applying the “Transformation Theory” framework to policy formulation aimed at improving labor productivity in the service industry. This logical model helps clarify the connection between government interventions and desired outcomes, rationalizes investments in supporting enterprises and workers, and provides strategic guidance for selecting optimal policy tools.

This approach is believed to enable more effective design and implementation of specific measures.

The report “Enhancing Labor Productivity in the Service Sector: Towards a Transformation Theory and Several Design Options” was authored by Ramonette B. Serafica, Queen Cel A. Oren, Emmanuel F. Esguerra, and Aniceto C. Orbeta, Jr.