State-run policy think tank Philippine Institute for Development Studies (PIDS) has cautioned that while the services sector has driven much of the Philippines’ economic growth, it has primarily created jobs in low-productivity, low-wage subsectors.

In a discussion paper titled “Increasing Labor Productivity in the Services Sector: Towards a Theory of Change and Some Design Options,” published on Dec. 23, researchers from PIDS said that raising productivity in labor-intensive services is crucial for driving economic growth and promoting equity, as the sector accounts for the largest share of the country’s gross domestic product (GDP) and employment.

The report, authored by Ramonette B. Serafica, Queen Cel A. Oren, Emmanuel F. Esguerra, and Aniceto C. Orbeta Jr., emphasized that government support should prioritize improving productivity in certain subsectors.

The think tank noted that low-productivity sectors—including wholesale and retail trade, vehicle repair, transport, accommodation and food services, and other services—make up the bulk of services employment in 2024 and mainly employ low- to medium-skilled workers with below-average wages.

PIDS added that women are disproportionately represented in these low-productivity sectors, with 68 percent of employed women working in such industries. It stressed that boosting productivity while ensuring women benefit is essential to narrowing the gender gap.

The PIDS paper emphasized that services with strong links to manufacturing, even if employing fewer workers, should be a policy focus. Productivity gains in these sectors can generate positive spillover effects across the economy.

To raise labor productivity, PIDS recommended a mix of strategies targeting both firm and worker capabilities. The think tank noted that while the services sector’s unique characteristics and heavy regulation can limit performance, firms can improve through better management, innovation, workforce development, and technology adoption, supported by broader structural reforms.

While various government agencies provide support to workers and micro, small, and medium enterprises (MSMEs), PIDS said a strategic framework integrating labor, enterprise, technology, innovation, and structural reforms could maximize the impact of public programs in boosting productivity across the services sector.

PIDS further added that the high-level Theory of Change (ToC) outlines pathways to boost labor productivity in the services sector and can guide the design and implementation of targeted interventions. It added that initiatives should be measured using productivity metrics and that the ToC can help national and local government agencies focus on specific issues while aligning with overall productivity goals.

The think tank also said the ToC can be adapted to specific service industries, groups, or regions. Industry experts can help identify suitable digital technologies and design productivity initiatives aligned with sector-specific quality standards.

The PIDS paper also called on regions to target specific subsectors based on current productivity levels or priority industries in their regional development plans, such as tourism, the creative sector, and logistics. The think tank highlighted tourism as a key area for productivity gains, noting that its differentiated markets include subsectors with particularly low productivity.

Further research, PIDS said, could examine factors affecting productivity, the impact of digital technologies and new business models, and the effectiveness of current programs to reduce implementation and sustainability risks.

Finally, PIDS said addressing regional disparities in services productivity requires analyzing local infrastructure gaps, regulatory barriers, and the effects of laws that may unintentionally affect incentives to upgrade. The think tank also suggested using non-monetary outcome measures, in addition to standard productivity metrics, to capture improvements relevant to specific services.

PIDS concluded that a more comprehensive, multidimensional approach to productivity analysis is needed to generate stronger evidence for productivity-enhancing policies and programs.

The latest Philippine Statistics Authority (PSA) data showed the labor force participation rate (LFPR) at 51.16 million in October. Unemployment rose to a three-month high, with about 2.54 million Filipinos jobless, while 48.62 million were employed.

Employment in agriculture and forestry rose by about 1.84 million quarter-on-quarter, PSA reported. Wholesale and retail trade also contributed to employment growth, adding 880,000 jobs, with 774,000 coming from retail stores selling food, beverages, and tobacco.

Accommodation and food service activities boosted employment by 195,000 jobs quarter-on-quarter, with restaurants and mobile food services accounting for 171,000 of the new positions.