Increasing Labor Productivity in the Services Sector: Towards a Theory of Change and Some Design Options

The growth of the Philippine economy has predominantly been led by the services sector. However, this growth pattern has resulted in increased employment primarily within subsectors characterized by relatively low labor productivity and wages. Given that the services sector accounts for the largest share of Gross Domestic Product (GDP) and employment among major economic sectors, enhancing productivity in labor-absorbing services is essential for both growth and equity. Analysis of labor productivity patterns reveals significant variation across services subsectors. While the Financial and Insurance Activities, Real Estate, and Information and Communication sectors have the highest productivity, the Wholesale and Retail Trade, Transportation and Storage, Accommodation and Food Service Activities, and Other Services sectors recorded the lowest. Low-productivity sectors primarily comprise low- to medium-skilled occupations. There is also variability in labor productivity within each subsector across regions. Regional disparities in productivity are most pronounced in the high-productivity sectors: Financial and Insurance Activities, Real Estate, and Information and Communication. In contrast, Transportation and Storage and Other Services exhibit the least variability in productivity levels. A mix of strategies is needed to enhance the capabilities of firms and workers and to incentivize them to upgrade. To increase labor productivity in the services sector, a high-level Theory of Change model was developed, focusing on four core strategies: management quality and practices, business innovation, workforce development, and technology adoption. Although broader structural reforms must also be pursued to create an operating environment conducive to upgrading, these reforms are beyond the control of individual firms. The umbrella Theory of Change provides a comprehensive and coherent framework to help the government more effectively identify pathways to connect interventions to desired outcomes, rationalize its investments to assist firms and workers, and adopt appropriate policy levers. Comments to this paper are welcome within 60 days from the date of posting. Email publications@pids.gov.ph.