How wage and productivity growth related to inflation in Idaho

Labor productivity is an important indicator for not just the labor market but Idaho’s overall economy. Wages are closely linked to labor’s marginal product, or the last unit of revenue produced from the last unit of labor employed. When markets are competitive and lack any frictions that impede price adjustments, wage and productivity growth will be equal.

Photo: construction workerIf productivity increases at a high growth rate and appears to continue for the foreseeable future (for example, continued investments in research and development, improved education and workforce training), it might be inferred that wages will grow at a similar pace; if productivity is expected to grow at a negligible rate or decline, however, wages can be expected to move similarly.

For any number of reasons, however, wages may diverge from workers’ marginal product, creating subsequent price pressures that work to clear the market of these imbalances. The wage-productivity growth differential – the difference between wage growth and productivity growth in percentage terms – can therefore serve as a predictor for future price inflation.

From the demand side, if wages are growing faster than productivity, then any additional spending power from workers above and beyond the last unit they produce means more money chasing after relatively fewer goods and services. On the supply side, wages growing faster than productivity reduce firms’ profitability as costs grow faster than revenues, and so firms will eventually pass that cost onto their consumers by either raising prices directly or indirectly by reducing supply.

Idaho’s large wage-productivity growth differential in 2020 contributed to its inflation in 2021 as measured by prices for final goods and services produced, and while its growth differential in 2021 was negative, it was the still above its neighbor, implying an expected inflation rate above adjacent states.

An analysis of labor productivity in Idaho and how it relates to wages and inflation can be found at The report provides insight to future trends in Idaho’s wages and productivity, comparisons with neighboring states and a look at influencing factors., regional economist
Idaho Department of Labor
(208) 236-6710 ext. 4249

This Idaho Department of Labor project is 100% funded by USDOL as part of an Employment and Training Administration award totaling $1,039,383.