There are considerable challenges, both conceptual and practical, to measuring activity in services sectors. We investigated deficiencies in current measures of services activities for the UK and how the measures might be improved. The project consisted of four strands. The first covered all services activities and involved an examination of price indices and how the UK compared to international best practice. The others focused on hard to measure sectors: education, insurance and financial services.
Good measures of services activities are crucial to understanding economic developments. Services are increasingly important as a share of value added and employment, and much of the increased productivity growth associated with the information technology revolution has occurred in services sectors. However, there are significant conceptual and practical difficulties in compiling accurate statistics on services activities. In this project we investigated some of the shortcomings of current measures of services activities for the UK and how these might be addressed.
The project built on the previous knowledge and experience of the research team, including the expertise of Bank of England colleagues Perry Francis, John Lowes and Charles Nourse, who produce the measure of nominal output of financial services by UK monetary financial institutions (MFIs) for ONS. We compiled a comprehensive audit of methodologies and data sources and compared growth in Services Producer Prices Indices (SPPIs) in the UK to fifteen competitor countries. In considering education services, we explored two avenues for improvement to current practice: first, quality adjustments applied to volume measures of school enrolments; second, output measures based on labour market earnings outcomes and embedded into a national accounting framework. Our work on insurance services explored measures of insurance output based on the increase in welfare generated by insurance, and alternatively, on risk carried. We compared the sensitivity of the UK methodology for calculating financial intermediation services indirectly measured (FISIM) to alternative choices of reference rate and discussed some of the other important methodological issues with FISIM. FISIM is a primary source of output produced by financial intermediaries.
Our audit of SPPIs concluded that it is unlikely that errors in measuring services prices are especially large in the UK compared with other countries, suggesting that this aspect of measurement is unlikely to explain the observed poor UK performance in productivity growth relative to other major economies in the past decade. The results did not, however, preclude that some services prices are badly measured everywhere, which might contribute to an explanation of the global productivity slowdown experienced by many countries. Our work highlighted large differences in prices for some services between business-to-business and business-to-consumer transactions. We suggest that efforts to improve measurement of prices in services should focus on understanding these differences.
Our work on education suggested that the use of standardised test scores may not capture key aspects of underlying skills that should be incorporated in quality adjustments, and points to the need to consider the education sector as a whole, rather than separating schools from further education. Our research also suggested that nominal and real output measures based on increments to lifetime earnings that can be attributed to formal education are a useful alternative method to current practice. Such measures could be incorporated into the national accounts in a consistent way by treating education as investment in social infrastructure, with education of foreign students allocated to exports.
We examined several alternatives to the way the Bank of England currently calculates the FISIM reference rate. We propose a method to potentially better capture MFIs’ cost of funding. We also suggest that adjusting FISIM estimates for loan defaults would probably be an improvement to the National Accounts.
Our research into the impact of different methods used to derive SPPIs shows clear biases between different approaches. This key evidence was submitted by the UK to the UN’s Voorburg Group on services statistics. Our work on insurance and financial services has provided a foundation for ONS to launch their planned reviews of these sectors as part of Blue Book 2021, and beyond; it also provides information that should be helpful when the FISIM methodology is again debated internationally. Our work on education is influencing ongoing work at ONS around the measurement of human capital and education output more widely.