K-shaped Recovery amid Covid-19

What is a K-Shaped Recovery?

Typical economic recoveries can include V, W, Z, U and L.However, economists are starting to think the recovery from COVID-19 might be K-shaped.This is likely as technology and large capital firms are expected to recover at a far faster rate than small businesses and industries directly affect by COVID-19, such as hospitality.

A K-shaped recovery happens when different sections of an economy recover at starkly different rates.

  • A K-shaped recovery is an unusual scenario where certain industries and individuals pull out of a recession, while others stagnate.
  • A K-shaped recovery essentially splits an economy in two, with the divisions occurring along class, racial, geographic, or industry lines.
  • A K-shaped recovery exposes pre-existing divisions and disparities in wealth, and can exacerbate them.
  • When compared to other recovery shapes, the K-shaped recovery poses a troubling, divergent economic future, one where the economy rebounds unevenly, and where the wealthy benefit while just about everyone else gets left behind.

K shaped Recovery

Implications of K shaped recovery

  1. The theory is that it stems from pre-existing social and economic divides that are then exacerbated by a recession or other economic catastrophe. The economy is essentially split in two. The divisions can occur along social class, racial, geographic, generational, or industry lines – or a combination thereof.What’s particularly concerning about a K shaped recovery is the way it splinters the economy, continually widening the gap between those who are doing well and those who are not. In the end, a K shaped recovery makes any existing problems of economic inequality much worse.
  2. Furthermore, a K-shaped recovery can reveal the existence of “creative destruction,” a term and concept coined and developed by Austrian economist Josef Schumpeter in 1942. According to Schumpeter, creative destruction occurs when novel technologies and industries take the place of old ones during a recession.
  3. A K-shaped recovery scenario can also provide financial and monetary clues into public policy response,benefiting some areas of the economy more than the others.
  4. More than half of the jobs lost due to COVID-19 were those of women because the sectors that were hit hardest—such as retail, hospitality and education—have a majority female workforce. In addition, only 47% of employed women were able to work from home (vs. 62% of men) and those who did transition to remote work saw a drop in productivity as schools and daycares shut down across the country.

Other Recovery Types

  • V-shaped recovery: A sharp decline followed by a rapid recovery, with very little time spent at the trough, or low point, of the recession.
  • U-shaped recovery: A steep decline followed by a period of time in which the economy sits at the low point of the recession before finally recovering.
  • W-shaped recovery: Also known as a double-dip recession, this is a scenario when the economy experiences a steep decline, followed by a small and temporary recovery and then a second decline.
  • L-shaped recovery: A severe recession in which the economy declines and doesn’t recover for years, if ever.

Covid-19 and K-Shaped Recovery

The covid-19 recovery path bifurcates in two directions: large firms and public-sector institutions with direct access to government and central bank stimulus packages will make some areas of the economy recover fast but leave others out. Those that get left out are the usual whipping boys: small and medium-sized enterprises (SMEs), blue-collar workers, and the dwindling middle class

Important Topics Prelims 2021

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