"Productivity isn't everything, but in the long run it is almost everything." If Paul Krugman's famous saying is right, the UK economy is in trouble because today's figures show that total hours worked rose by 1.1% in the last three months, which implies that output per hour is falling, and is well below its pre-recession peak. And Duncan thinks Krugman is right:

Unless we see a pick-up in productivity growth soon then the UK risks much slower growth, and lower living standards, in the future.

But could it be that they are both wrong, and that stagnant productivity and decent output growth are compatible for at least a few more years?

To see my point, consider the standard story about why productivity matters. This says that if there's no productivity growth, output growth requires more employment and this higher demand for labour will raise wage growth. This will lead either to higher price inflation and hence higher interest rates or to a profit squeeze. Either higher rates or a profit squeeze would reduce firms' motives to expand and so kill off growth. Sustainable output growth thus requires productivity growth.

But there's something wrong with this story. As Jon Philpott points out, wage inflation has so far not risen at all in response to falling unemployment. There are several reasons why this might be, which might continue to hold down wages:

- Unemployment is higher than the jobless count suggests, implying that there's much more pent-up supply of labour. If we add to the unemployment count the inactive wanting work and part-timers wanting full-time work, there are still over six million people unemployed or under-employed. And even if employment grows by 2% a year for the next five years, there'd still be three million jobless on this measure.

- Memories of the great recession will have a scarring effect, by making workers scared to push for higher wages.

- The mass supply of labour from the far east will continue to hold wages down (pdf).

- Pay restraint and job losses in the public sector - the OBR foresees general government employment falling by over 500,000 in the next four years - will hold down private sector wage growth.

If these factors continue, we could see more of what we've had recently - GDP growth plus jobs growth without much inflation and hence no need for higher interest rates.

This need not imply a squeeze on profits. Wage growth of one per cent and zero productivity growth implies unit wage costs of one per cent. Barring adverse commodity price shocks, this is consistent with stable profit margins at low inflation. And with output growth raising the output-capital ratio, this gives room for profit rates to grow, thus maintaining or even increasing firms's motives to invest.

Granted, this story implies a fall in real wages for those in work. But this is offset by rising incomes as other move into work. In the year to Q3, real disposable incomes rose despite falling real wages, in part because of rising employment.

There is, of course, a lot that could go wrong with this scenario, and I'm not sure I believe it myself - though you shouldn't give a damn what I believe.But there's one thing that lends it a little credence.It's that some research has found that the link between output growth and productivity growth even over longish periods isn't as strong as you might think.

So, perhaps we should consider the possibility that we'll see continued stagnant productivity and output growth for a few more years. This would imply that the wage squeeze will continue even as unemployment falls.