Improving productivity in the service industry is a turning point for the growth of the Philippine economy and the reduction of disparities

Serious structural issues are hidden within the Philippine service industry. The latest report from the government-affiliated think tank, the Philippine Institute for Development Studies(PIDS), has revealed the true nature of these challenges.

The Reality of Low Productivity Dominating Employment

According to data from the Philippine Statistics Authority, the growth rate of the service sector in the third quarter was only 5.5%, slowing from 6.3% in the same period last year. More concerning is the industrial structure supporting this growth.

Wholesale and retail trade, transportation and warehousing, accommodation and food services, and other low-productivity industries account for 73.6% of total employment in the service sector. Jobs in these sectors mainly require low to medium skills, and wage levels remain below average.

In other words, while the Philippine service industry absorbs a large number of workers, it fails to provide sufficient productivity improvements and compensation for those workers, revealing a concerning imbalance.

Service Industry as a Breeding Ground for Gender Inequality

This issue is closely linked to gender disparities. 68% of female workers are engaged in the service industry, particularly concentrated in wholesale and retail trade and accommodation and food services.

As pointed out by PIDS, low productivity and wages in these sectors hinder the economic advancement of female workers. It is not just about expanding employment but about achieving qualitative productivity improvements that enable women to benefit from narrowing gender gaps.

The Risk of Overlooking Spillover Effects on the Entire Economy

Interestingly, these low-productivity service industries have strong forward linkages with other sectors such as manufacturing. In other words, improving productivity in the service industry has the potential to generate spillover effects across the entire economy.

According to PIDS analysis, individual companies can increase productivity through management practice improvements, investment in innovation, workforce skill development, and adoption of new technologies. However, upgrading the sector as a whole requires a strategic framework that integrates key policy areas such as labor markets, enterprise and industry development, technology, innovation, and structural reforms.

Urgent Need for Policy Design Based on Transformation Theory

PIDS advocates for the use of a “transformation theory” framework to address how the government should respond to productivity issues in the service industry. This logical model helps to more effectively identify pathways linking specific interventions to desired outcomes and to rationalize investments in companies and workers.

The authors of the report, “Enhancing Labor Productivity in the Service Sector: Towards a Transformation Theory and Several Design Options,” released on December 23, argue that the government should systematically approach this challenge through concrete policy design.

Growth and equity are not mutually exclusive; rather, they can be simultaneously achieved through productivity improvements in the service industry. To accomplish this, comprehensive policy interventions and strategic frameworks led by the government are urgently needed, alongside efforts by individual enterprises.