Demand-led stagnation: reinterpreting the UK productivity puzzle

Gudgin, Graham; Coutts, Ken; Saite Lu Growth in UK labour productivity has stagnated markedly since the 2008 Global Financial Crisis (GFC), constraining living standards and public spending. Moving beyond traditional supply-side explanations of this ‘productivity puzzle’, this paper analyses the slowdown through a demand-led framework based on the Kaldor-Verdoorn relationship, combined with a macro-economic environment of historically low interest rates. The Kaldor-Verdoorn relationship is conventionally interpreted as faster growth in demand leading to greater economies of scale and learning by doing and hence higher productivity. We document a persistent cross-sector and international link between output and productivity growth with an international average elasticity of 0.7, only a little above Kaldor’s value of 0.5 (which was for manufacturing only). Following the GFC, a severe credit contraction and subsequent fiscal austerity suppressed aggregate demand, reducing UK average annual output growth from 2.8% to 1.1%, while productivity growth more than halved from 2.1% to 0.87% (using recently revised ONS data). Productivity growth fell after 2008 despite an increase in real business investment. The decline in productivity growth has not been greater in the UK than in other G7 nations and the elasticity of productivity growth to output growth was close to the G7 average of 0.7. The slowdown in output growth was not matched by a similar slowdown in employment (although hours worked did fall). This structural shift in employment reflected ultra-low interest rates that stimulated low-productivity business formation, an elastic labour supply, and a retreat from globalised production. In short, our view is that slow growth in demand since 2008, occasioned by a squeeze on private credit accompanied by fiscal austerity, led to slow growth in productivity, made worse by extremely low interest rates. Because aggregate productivity dynamics are fundamentally endogenous to effective demand, conventional supply-side interventions remain largely ineffectual. Re-establishing long-run productivity growth requires macro-demand regimes capable of sustaining autonomous expenditure across both public and private sectors.

Demand-led stagnation: reinterpreting the UK productivity puzzle

Graham Gudgin, Ken Coutts and Saite Lu Growth in UK labour productivity has stagnated markedly since the 2008 Global Financial Crisis (GFC), constraining living standards and public spending. Moving beyond traditional supply-side explanations of this ‘productivity puzzle’, this paper analyses the slowdown through a demand-led framework based on the Kaldor-Verdoorn relationship, combined with a macro-economic environment of historically low interest rates. The Kaldor-Verdoorn relationship is conventionally interpreted as faster growth in demand leading to greater economies of scale and learning by doing and hence higher productivity. We document a persistent cross-sector and international link between output and productivity growth with an international average elasticity of 0.7, only a little above Kaldor’s value of 0.5 (which was for manufacturing only). Following the GFC, a severe credit contraction and subsequent fiscal austerity suppressed aggregate demand, reducing UK average annual output growth from 2.8% to 1.1%, while productivity growth more than halved from 2.1% to 0.87% (using recently revised ONS data). Productivity growth fell after 2008 despite an increase in real business investment. The decline in productivity growth has not been greater in the UK than in other G7 nations and the elasticity of productivity growth to output growth was close to the G7 average of 0.7. The slowdown in output growth was not matched by a similar slowdown in employment (although hours worked did fall). This structural shift in employment reflected ultra-low interest rates that stimulated low-productivity business formation, an elastic labour supply, and a retreat from globalised production. In short, our view is that slow growth in demand since 2008, occasioned by a squeeze on private credit accompanied by fiscal austerity, led to slow growth in productivity, made worse by extremely low interest rates. Because aggregate productivity dynamics are fundamentally endogenous to effective demand, conventional supply-side interventions remain largely ineffectual. Re-establishing long-run productivity growth requires macro-demand regimes capable of sustaining autonomous expenditure across both public and private sectors.

Working Papers from Centre for Business Research, University of Cambridge

Abstract: !!! ABSTRACT !!!

Keywords: Demand-led growth; productivity puzzle; endogenous productivity; effective demand; monetary policy; UK economy (search for similar items in EconPapers)
JEL-codes: D24 E22 E24 J24 O47 (search for similar items in EconPapers)
Date: 2026-09
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