Why is it so difficult to measure productivity in the financial services sector?

The financial services industry is one of the UK’s economic powerhouses, generating significant value and employing highly skilled workers. But measuring productivity within the sector is challenging, making it hard to design effective policies that maximise the potential of this critical part of the economy.

In the years leading up to the 2007/08 Global Financial Crisis, productivity growth in the UK financial sector was the highest among G7 economies, surpassed only by Spain. Multifactor productivity (MFP) in the sector grew by around 40% between 1990 and 2007, fuelled by deregulation, financial innovation, and London’s sustained rise as a global hub for financial services.

The crisis marked a turning point. From 2007 to 2014, financial services MFP fell by 20%. This happened even as other UK industries managed to increase their productivity over the same period. In terms of productivity growth, measured as gross value added (GVA) per hour worked, the UK financial sector has been the slowest in the G7 since the crisis, behind only Italy over the past ten years (Figure 1).

Figure 1: Financial sector GVA per hour worked

Source: Authors’ elaboration using OECD data.
Note: Index 2025 = 100. This data is indexed, so it must be read as relative values (evolutions) rather than absolute values.

Despite this recent downturn, the financial sector continues to be a strong driver of economic growth in the UK economy. In 2024, financial services contributed over £200 billion in GVA – 8.6% of the total, and one of the highest shares among advanced economies. Only the United States has a financial sector of comparable weight relative to GDP (Figure 2). In fact, output per worker in the UK financial services sector is more than double that of manufacturing and nearly three times higher than the economy as a whole.

Figure 2: Size of the financial sector GVA in the UK and peer countries

Source: Authors’ elaboration using OECD data.

Looking at regional GVA, financial sector gains are distributed highly unevenly across the UK. London alone generates half of the UK financial sector’s ‘value added’, followed by the South East, which contributes less than 10%. The City of London and Canary Wharf are global centres for banking and insurance, but this regional imbalance leaves other parts of the country disconnected from the sector’s economic gains.

In terms of the traditional measure of output, the financial sector remains among the most productive in the UK. But if we look at productivity growth, progress has been stagnant since the financial crisis. The traditional ‘output approach’ is calculated as the value of the industry’s gross outputs minus the value of the intermediate inputs used in the production process. This creates complications when measuring productivity in services. For example, intermediate services, such as legal advice and IT support, do not count towards the financial sector’s GVA. This causes headaches when trying to understand the productivity of the sector.

Other measurement challenges in the financial sector

Measuring productivity in finance is notoriously complex. Unlike manufacturing, where outputs can be counted in physical units, financial services output is often captured indirectly through measures such as ‘Financial Intermediation Services Indirectly Measured’ (FISIM) or survey-based estimates of employment and pay. These methods are imperfect and sometimes misleading. This can lead to misjudgement in both the sector’s contribution to growth and its systemic risks.

Traditional productivity metrics such as GVA, FISIM, and measures derived from the Labour Force Survey (LFS) have well-documented limitations and often fail to capture the full scope of financial activities. Some of these weaknesses include:

GVA: output is estimated differently across sub-sectors, relying on fees, commissions, premiums or employment numbers. In supplementary (or ‘auxiliary’) services such as asset management, using employment data as a proxy for output can underestimate true productivity.
FISIM: calculated using interest rate margins, this measure can be skewed depending on whether a risk-free or risk-inclusive reference rate (i.e., benchmark rate) is chosen. Including risk premia can overstate output by treating risk-taking itself as productive.
LFS: declining response rates and lack of industry stratification make this survey increasingly unreliable for sector-specific estimates.

Metrics such as GVA and FISIM are strictly defined within international frameworks, meaning adjustments must align with established methodologies. While these guidelines ensure consistency and comparability across countries and industries, they also present inherent limitations in capturing the full breadth of financial sector productivity.

These challenges highlight the need for complementary indicators that better reflect how finance creates value. Researchers and policy-makers interviewed for this research by LSE economists emphasised that productivity in finance is not always well captured by output-to-input ratios and may require sector-specific measures.

Towards better measurements

The challenges mentioned above highlight the need for the construction of proxy or alternative indicators to assess the productivity of financial services. Some steps to address this could include:

Introduce proxy indicators by sub-sector: regulators could supplement traditional metrics with output-related ratios. For banks, this might mean new loans or deposits per employee. For insurers, sales commissions per employee could be tracked. Sector-wide, revenue per employee offers a straightforward benchmark for productivity. These indicators are easy to interpret and align with how people in the industry already monitor performance.
Revise measurement for the auxiliary financial services sub-sector: given the limitations of employment-based proxies, alternative metrics could include asset management fees or service charges. These are more directly tied to output and would better capture the value generated by asset managers and other auxiliary providers, which account for about 15% of financial sector output.
Track regulatory impacts: instead of looking only at output, regulators might measure how rules affect efficiency. Indicators such as the time required to bring a new product to market or file an initial public offering (IPO) prospectus could reveal how regulation shapes productivity. This would help policy-makers strike the right balance between stability and competitiveness.

Looking ahead, new technologies could be both a challenge and an opportunity for measuring productivity within the financial services sector. Artificial intelligence, blockchain technology, and digital finance are reshaping business models, but their impact is not yet fully reflected in productivity statistics. If harnessed effectively, these innovations could ramp up efficiency and competitiveness. But again, questions remain about how to then measure this accurately.

Improving the productivity of the UK’s financial services sector will require a forward-looking framework that combines better measurement, smarter regulation, and support for innovation. By refining how productivity is assessed, ensuring rules promote both stability and efficiency, and by harnessing new technologies, the UK can reinforce the financial sector’s role as a driver of growth and stability while remaining competitive in an evolving global landscape.

Where can I find out more?

Finance and growth - beware the measurement: A CEPR column on different interpretations of early results on the relationship between finance and growth.
Measuring financial sector output and its contribution to UK GDP: A report on the contribution of the financial sector to GDP and the uncertainty around recent estimates.
Financial regulation in the UK: A case study examining how the UK’s financial regulatory framework promotes stability and the safety and soundness of banks, offering lessons for the design of AI regulation.
How can the UK revive its ailing productivity?: An Economics Observatory article on UK productivity and the strategies that policy-makers must establish to boost productivity.