School of Social & Political Sciences

The dominance of the UK's financial sector siphons off graduate talent, leaving other vital sectors in the dust 

'When I grow up, I want to be an investment banker in Canary Wharf.' It's not what you would expect to be hear in the playground, yet by graduation, a surprising number of Britain's brightest are headed to London saying just that. 

Each year, London's financial sector draws in waves of talented graduates, 'hollowing out' other critical economic sectors. Just like other parts of the economy, the finance sector competes for its resources, and talent is no exception. With almost a quarter of UK graduates working in London six months after graduation and a third of them in finance, it is clear who emerges the 'big winner', whilst other sectors, and the regions they are based in, struggle to thrive. 

But is this competition really fair? The vast majority of graduates, particularly those who studied STEM subjects, might argue 'yes'. For STEM graduates in particular, economic pragmatism is the primary reasion for their imminent departure from STEM. London's finance sector far outpaces other fields in pay, offering entry salaries of around £55,000 - almost double the £29,000 typical in engineering. Finance also provides clearer entry pathways and ample internship opportunities, making it easier for STEM graduates to leverage their skills for lucrative roles. Demand reflects this: finance applications have surged by 25%, far outpacing the 9% increase in engineering, as salary and job security steer graduates' choices.

It is however a compelling counterargument that this graduate migration isn't merely a matter of financial pragmatism - it reflects systematic and structural distortions that disproportionately benefit the finance sector. With the 'cost of living' crisis exacerbating challenges for those entering lower-paying fields, finance is not necessarily 'winning' talent so much as monopolising it. Other sectors, often unable to compete with the finance sector's salaries and benefits, lack of resources to innovate, limiting the UK's economic resilience and diversity. It is not that these sectors are failing to compete; rather, they are constrained by historical and structural factors.

Britain's Finance-Led Economy: A Legacy of Liberalisation or Imbalance?

Today, London is the world's second-largest financial hub, but this status isn't a mere result of natural market forces. London's role as a financial apex has deep roots in British history - from imperial connections to the founding of the Bank of England and the London Stock Exchange. However, it was the period of 1970 to 1990 which cemented the pathways of graduates today.

The dismantling of the Bretton Woods system in 1971, ending fixed exchange rates, and Thatcher's 1986 'Big Bang', which deregulated London's finance sector, set the stage for today's liberalised economy. This liberalised economy is closely linked to the benefits loudly boasted by London's Finance sectors contribution to the British economy, such as the £110bn tax contributed in 2023. However, to describe the finance sector as a 'gravy train' is simply wrong. Drawing on research by current Bank of England economist, Christiane Kneer, it becomes clear that whilst financial liberalisation is associated with skill-upgrading in the finance sector, it causes irrefutable damage to non-financial sectors via a brain-drain effect. Whilst the increased capital flows and profit marginss since the 1970s have allowed the finance sector to entice graduates with large salaries, it has made it impossible for other sectors to compete. It is apparent that the finance sector in London has both a historical and structural advantage. 

International Comparisons and the Real Cost of Concentration

The downsides of a liberalised finance sector extend far beyond salary discrepancies and a brain drain from alternative sectors. A striking illustration of this can be found in the comparison between the UK and Germany. As of 2023, the UK scores 1.0 on the financial liberalisation index, with 12.5% of university graduates entering the finance industry. In contrast, Germany, with a lower score of 0.9, sees just 6.3% of its graduates pursuing finance. 

A report from PwC underlines these points with a stark narrative of the UK's economic structure compared to Germany. While the UK performs well in finance and extractive industries, it significantly underperforms in almost every other major sector. Manufacturing, utilities, information and communication, and even areas like professional services all show notably lower productivity per worker than their German counterparts. Crucially, the report makes clear that Germany's advantage isn't simply because it has more productive industries - it also outperforms the UK within shared sectors. 

Sure, the UK shines brightly in finance and extraction, but if you take a closer look, you will see that it lags behind in nearly every other major industry. This isn't a minor hiccup: it is a glaring issue highlighting the UK's narrow obsession with finance at the expense of a diverse industrial base. 

Kneer's research sheds light on how excessive financial liberalisation provokes not only a brain drain from alternative sectors but also cripples overall productivity and industrial structure. In the UK, this means that as more graduates flock to the finance sector, critical fields like manufacturing and technology are left vying for talent. The result? A troubling structural imbalance where vital industries struggle to thrive. 

As the PwC report shows, Germany's productivity edge reflects the strength of a more balanced economy - one that spreads its talent and resources across multiple high-performing sectors. In contrast, the UK's finance-heavy model risks leaving essential industries behind. While the finance sector in London is often dubbed "the goose that lays golden eggs", the reality is more sobering: this concentration creates a talent vaccum, stifling growth and innovation across the board.

Germany's more balanced approach offers valuable lessons. By promoting a diverse industrial structure, it encourages broad productivity gains and reflects a sustainable model for long-term economic growth. Kneer's findings make it clear: while financial liberalisation may lure the brightest graduates with attractive pay-checks, it simultaneously undermines productivity in sectors that rely on skilled labour, particularly those heavily involved in research and development.

Thus, by placing all of its 'eggs in the finance basket', the UK sacrifices productivity in the very areas that drive sustainable economic resilience. This risky gamble starkly contrasts with Germany's model, which proves a diversified economy is not merely a bragging right but a necessity for long-term success. Ultimately, the liberalised finance industry in London creates a domino effect: it attracts an influx of talented graduates in finance, excerbating the brain drain from vital sectors, undermining the UK's industrial structure, and resulting in a significant loss of overall productivity. Against this backdrop, the need for a more balanced approach has never been more apparent! 

A Path Forward: Regional Industrial Clusters Beyond London

Perhaps it's fair to say that the finance sector in London is proof you can have too much of a good thing. Just like a glass of wine, there is strong research in favour of the view that London's finance sector offers benefits up to a point, but beyond that, excessive concentration does more harm than good. The consequences of this concentration are clear. Yet, the trend evidenced above also provides evidence in favour of the broader and heavily criticised 'decline debate' regarding the British economy, in particular 'Labour declinism', which argues that Britain's failure to deliver productivity as a result of high finance, leads to low growth in emerging sectors. 

Given recent commitments from Labour Prime Minister Keir Starmer, who pledged to 'root out 14 years of rot [and] reverse a decade of decline', it is perhaps surpising to see that the new government has made no 'concrete' plans to tackle the brain dump of graduates into the finance sector. Although the Labour manifesto boasts plans to extend research and development funding cycles to ten years, and this may assist us in taking advantage of our innovative research, it is clear that this alone will not resolve the underlying crisis. 

Instead, we must focus our efforts towards the 'root' of the problem. Whilst the opportunity to rewrite the history books and de-liberalise our finance sector may be a 'ship already sailed', containing the influx of graduates towards finance in London is a more realistic goal. We must convince these graduates that there is more to Britain than London's 'bright lights'. The Institute of Public Policy proposes creating regional industries clusters around universities to help retain graduates outside of London. Given the world-class status of our academic institutions, with seven of the ten universities within top-100 global rankings being based regionally, the IPPR's suggestion to foster clusters around these institutions, such as Cambridge's 'Tech City' or Salford's 'Media City', could have a meaningful impact. By encouraging graduates to work in these hubs, the UK will not only boost productivity in alternative sectors but bring wider prosperity to regional economies currently struggling against the gravitational pull of London. 

Change is not just needed - it is overdue. By dispersing opportunities beyond London, supporting diverse sectors and investing in regional clusters, we can break free from the over-reliance on finance that pulls talent away from the UK's broader potential. A future where every sector and region thrives isn't just possible - it is essential for sustainable growth.

This blog is part of the SPS Student Academic Blog series. You can read more contributions from the series here.

First published: 7 April 2025