Decades of strong growth have given way to a new reality: the prospect of economic stagnation. Unlike brief recessions, stagnation tends to persist, highlighting underlying structural shifts that moderate productivity, slow innovation, and weigh on growth potential.¹ The question of what drives this phenomenon, and how best to respond, remains a priority for economists and policymakers.
One of the most influential voices in this discussion is Edmund S. Phelps, a Nobel Prize in Economic Sciences recipient in 2006 and Professor at Columbia University.² Renowned for his work on economic dynamism, Phelps has shown how societies risk stagnation when creativity fades, and innovation loses momentum.³
At the same time, his research points to a path forward, one that empowers individuals and fosters grassroots innovation to restore growth and vitality.⁵ This perspective offers a valuable lens for understanding not only why stagnation occurs but also how economies can overcome it, a theme we explore in the following sections.
What defines economic stagnation?
Economic stagnation refers to a prolonged period of minimal or no economic growthwhat is economic growth, often accompanied by slow job creation and stagnant wages.⁶ Unlike short recessions, it tends to persist due to underlying structural issues, such as low productivity, limited innovation, and rigid economic systems that constrain progress.⁶,⁷ Other pressures, such as entrenched market interests, restrictive regulations, aging populations, and rapid digital disruption, can further weaken demand and slow the rise of new businesses.⁸,⁹
How does economic stagnation affect jobs, wages, and innovation?
Impact on jobs and wages
One of the most immediate effects of economic stagnation is fewer job creations. As economic activity slows, businesses often reduce hiring or even lay off workers, leading to higher unemployment rates. For instance, in August 2025, the U.S. economy added only 22,000 jobs, well below economists' expectations of 76,500. The unemployment rate also rose to 4.3%, its highest level since late 2021.¹¹
During such periods, wage growth typically stagnates. With an oversupply of labor and reduced demand for goods and services, employers have less incentive to increase wages. This stagnation in wages can lead to decreased consumer spending, further slowing economic growth. In addition, the lack of job opportunities can result in underemployment, where individuals work fewer hours than they desire or are overqualified for their positions.¹²,¹³
Impact on entrepreneurship and innovation
Entrepreneurship also struggles in a stagnant economy, as the uncertainty and reduced consumer demand make it challenging for new businesses to thrive. A lack of entrepreneurial activity can stifle innovation and the creation of new job opportunities.¹⁴ Phelps places particular emphasis on what he calls "innovative dynamism," a society's collective drive for creativity, experimentation, and risk-taking that supports broad-based innovation.⁴
According to Edmund Phelps, when this dynamism fades, the risk of stagnation rises. Renewing this spirit of innovation, he argues, is essential for economies to move forward.¹⁰ He also stresses the human dimension, pointing to the "loss of 'good jobs' that offered the chance to imagine and create things." Without such opportunities, workers face limited prospects for both income and meaningful, creative engagement. Over time, this can erode motivation and discourage entrepreneurship, further weighing on economic progress.³
How do labor market policies reduce economic stagnation?
Labor market policies can play an important role in helping economies remain dynamic and adaptable. The OECD notes that active labor market policies (ALMPs), including vocational training, job-search support, and hiring incentives, can improve job matching and participation, contributing to stronger employment outcomes.¹⁵,¹⁶
Healthy and resilient labor markets usually depend on:
- Skills and lifelong learning: Continuous training helps workers adapt to changing industries and technologies.¹⁵
- Labor mobility: Flexible labor markets allow people to transition more easily between jobs and sectors, reducing mismatches.¹⁵
- Wage transparency: Clearer alignment between wages and productivity can support more sustainable growth.¹⁶
- Entrepreneurship: Supporting small business creation contributes to job opportunities and innovation capacity.¹⁷
Phelps emphasizes that labor market policies should not only aim to lower unemployment but also support economic dynamism. This means creating environments where workers can take initiative, experiment, and expect their efforts to be rewarded with growth in wages and personal advancement.¹⁰ By enabling individuals to engage in meaningful, creative work, labor markets can become engines of innovation, helping break the cycle of stagnation and laying the groundwork for more resilient, long-term growth.¹⁰
Final thoughts: a future built on creativity
Phelps’s insights remind us that, at its core, overcoming stagnation also requires fostering an environment where people can use their talents, take initiative, and see their contributions reflected in real progress. If innovation and human potential are placed at the center, economies can lay the foundation for more durable growth.
While the causes of stagnation are complex, the underlying message from Phelps is clear: renewal depends on creativity and participation at all levels of society. Recognizing the role of individuals as drivers of change may help economies remain resilient in the face of future challenges.
To explore related perspectives on economic growth and renewal, visit UBS Nobel Perspectives & Economic Views. Our platform offers engaging discussions and policy-relevant insights informed by Edmund Phelps and other Nobel laureates across economics and innovation.
References
- OECD. Secular stagnation: evidence and implications for economic policy. OECD, 2014.
- Phelps E. Edmund Phelps – Biography. EdmundPhelps.com.
- UBS. Edmund S. Phelps: Economic stagnation. UBS Nobel Perspectives, 2026.
- Singh A. Edmund Phelps on innovation, prosperity, and the good life. Social Science Encyclopedia, 2025.
- Phelps E. Reflections on Mass Flourishing: 10 Years Later. Civitas Institute, University of Texas at Austin, 2024.
- Summers LH. Accepting the Reality of Secular Stagnation. Finance & Development, 2020.
- Indian School of Public Policy. The pitfalls of economic stagnation and its impact on national economic health. ISPP, 2025.
- Cylus J, Al Tayara L. Health, an ageing labour force, and the economy: does health moderate the relationship between population age-structure and economic growth?. Social Science & Medicine, 2021.
- International Monetary Fund. High uncertainty and the unknown. IMF Annual Report 2024 – In Focus, 2024.
- Phelps E. Mass flourishing and economic dynamism. Finance & Development, 2024.
- CNN Business. U.S. jobs report – August 2025. CNN, 2025.
- Mishel L, Gould E, Bivens J. Wage stagnation in nine charts. Economic Policy Institute, 2015.
- Chen J. Underemployment: definition, causes, and example. Investopedia, 2025.
- Isarabhakdee P. How entrepreneurship can spur growth in a stagnant global economy. World Economic Forum, 2025.
- OECD. OECD Employment Outlook 2025: Reviving growth in a time of workforce ageing. OECD Publishing, 2025.
- OECD. Workforce Composition, Productivity and Pay. OECD Publishing, 2022.
- U.S. Bureau of Labor Statistics. Small businesses continue to outpace large businesses in job creation. The Economics Daily, 2025.