How Does Productivity Affect Inflation, Jobs and Pay?

Many economists believe that if generative AI helps raise productivity, it could lead to lower inflation.

But why would greater productivity help push down inflation? St. Louis Fed Senior Economic Policy Advisor Alex Bick answered that question and others about productivity, including the effect of growing productivity on wages and employment and whether productivity gains from AI have shown up in the economy.

What Is Productivity?

Productivity measures the amount of goods and services that are produced (outputs) relative to the amount of the labor, capital (e.g., machinery and equipment) and other things used to make those goods and services (inputs), according to the U.S. Bureau of Labor Statistics (BLS). Labor productivity and total factor productivity are two different ways to measure productivity.

Labor productivity is how much output a worker produces in a certain amount of time. Aided by advances in technology, from robots on factory floors to desktop computers in offices, labor productivity has grown in the U.S. (See the FRED chart below for the trend since 1947.)

Total factor productivity (TFP) is a measure of how efficiently an economy converts labor and capital into output. The FRED chart below shows the percent change from a year ago for the U.S. private business sector.

Higher Productivity and Inflation

How does increased productivity help reduce inflation? The answer is tied to a simple economic concept called the quantity theory of money. Its equation is MV=PQ, in which the parts of the equation are:

• M is the money supply — the amount of money available in an economy
• V is the velocity of money — how often the money is used
• P is the prevailing price level — the average level of prices of goods and services in an economy
• Q is quantity — everything produced in that economy

Say both the money supply and velocity of money are fixed. “If productivity goes up — let’s say because of AI — you’re going to produce more,” Bick said. “But because the amount of money that’s out there in the economy stays the same, that means prices have to fall.”

Productivity and Supply and Demand

Productivity’s relationship on inflation also can be understood through the concept of supply and demand: If the amount of goods produced suddenly drops (which economists call a negative supply shock) while demand remains the same, the price goes up. (For example, as car prices did during supply chain shortages during the COVID-19 pandemic.) And if these shocks occur across a wide range of products, the price increases can lead to a rise in the overall price level, i.e., inflation.

Likewise, an increased supply of goods (a positive supply shock) amid stable demand will cause prices to fall.

“Think of that as the conceptual framework, why the argument is made that if AI is this productivity boom, we’re just going to have more stuff,” Bick said. “And then there’s more supply for the same demand; that means the price goes down.”

Yet, there is also a possibility that AI might cause prices to increase, as people and companies anticipate productive gains from the new technology before the gains are actually realized.

Workers, expecting higher wages in the future, start to spend more today, increasing demand. Firms, wanting to capture these gains, feel they need to invest in AI, boosting demand today before output has started to increase.

Bick noted there already is an ongoing investment boom in data centers to support AI. The supply of some of the parts needed to build those centers isn’t keeping up with demand, which brings up prices, he said. And there are concerns that electricity prices could go up because the capacity to produce more energy cannot keep up with the higher demand from data centers in the short term.

Productivity Gains from AI

Has the economy started to see productivity growth because of AI? Bick and fellow researchers have been exploring that question, and he answered the question with a qualified “yes.”

Bick and the other researchers looked at the relationship between industries’ productivity growth and those industries’ adoption of AI. Comparisons of European and U.S. growth between 2022 to 2024 for Europe and from the fourth quarter of 2022 to the third quarter of 2025 for the U.S. are in their March 2026 On the Economy blog post, “Mind the Gap: AI Adoption in Europe and the U.S.”

During this period, U.S. industries that had higher AI adoption rates experienced faster productivity growth than their pre-2020 trend, according to the researchers. They found that a 10 percentage point increase in AI adoption among an industry’s workers was associated with 2.9 percentage points of additional cumulative labor productivity gain.

“We find this strong evidence for AI having positive effects,” Bick said, though he cautioned that there might be other reasons for those industries’ productivity growth, such as investment in other automation.

And if an economy isn’t showing growth, that doesn’t mean AI hasn’t contributed — there could be other aspects of an economy that are depressing growth while AI is helping to lift it, he added.

Productivity and Wages

Employers tend to give workers raises when they’re more productive and to compensate them for general increases in the price level, Bick said. There might be very high wage increases in a specific sector or during unusual times, such as during the COVID-19 pandemic, when many people stopped working or didn’t want to work in certain sectors.

“But typically, wage increases reflect productivity and inflation,” Bick said.

Since generative AI is expected to increase productivity, its use and spread also could have that effect.

Bick referred to an October 2025 speech by Federal Reserve Gov. Christopher Waller on AI and innovation, who said that any sustained productivity growth above 2% “will tend to support rising real incomes and living standards without inflation pressure.”

That is, if generative AI spurs a productivity boom, this will help people get higher wages while inflation can stay low. “Then these productivity gains will translate into gains for workers,” Bick said.

Generative AI and Jobs

Some workers may be more productive and earn higher wages because of generative AI. But will others lose their jobs?

“If you look at other technological revolutions over time, there are always some adjustment costs for people that had jobs where the technology replaces them, and these jobs disappear,” Bick said.

Depending on what their skill sets are, the people who lost jobs may have a harder time finding a new one than they did previously. But the effect on jobs is “incredibly hard to forecast,” Bick said.

He pointed to the evolution of farming as an example. In 1900, about 41% of U.S. workers were in farming, according to a November 2025 article by University of Nebraska Professor E. Wesley Peterson. Today, less than 2% of workers are in agriculture. That decrease is largely because of technological progress, Bick said. He noted that some food is imported.

“Back then [in the 1900s], if you would have told people, ‘You know what, in the future, less than 2% of the people will be enough to produce the food we need,’ they would have said, ‘This is crazy,’” Bick said.