K-Shaped Recovery

What Is a K-Shaped Recovery?

A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes. This is in contrast to an even, uniform recovery across sectors, industries, or groups of people. A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession. This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter "K."

Key Takeaways

  • A K-shaped recovery is one in which the performance of different parts of the economy diverges like the arms of the letter "K."
  • Economic performance of different sectors, industries, and groups within an economy always differ to some extent, but in a K-shaped recovery some parts of the economy may see strong growth while others continue to decline.
  • Unlike other letter-shaped descriptors, which focus on large aggregates, a K-shaped recovery is described in terms of data broken out across different parts of the economy.
  • The meaning of a K-shaped recovery really depends on the choice of how to disaggregate data across the economy.

Understanding a K-Shaped Recovery

The term "K-shaped" recovery rose to prominence in 2020 in the wake of the sharp recession in the U.S. that accompanied the COVID-19 pandemic, and was used to describe the uneven economic recovery across different sectors, industries, and groups of people in the economy. Unlike other letter-shaped descriptors of economic recessions and recoveries (L-shaped, V-shaped, U-shaped, or W-shaped), which describe the path of economy-wide macroeconomic aggregate variables like Gross Domestic Product or total employment, a K-shaped recovery describes the path of different disaggregated economic variables, such as income across different segments of society or employment in different industries, relative to one another.

Image by Sabrina Jiang © Investopedia 2020

While economic performance always varies across different parts of the economy, economists generally understand economic cycles of recession and recovery to be broadly correlated across all or most sectors of the economy. What makes a K-shaped recovery different is that while some parts of the economy may enjoy a booming recovery immediately following the recession, others may remain mired in sluggish growth or even continue to decline. The general shape of such divergent performance of different parts of the economy will resemble the arms of a letter "K" if charted together, with one rising and the other declining.

What exactly this means depends on how the aggregate macroeconomic data are broken out to suggest the K-shaped profile. It can mean that some industries quickly return to strong growth in output while others see declining activity, or that some types of asset values rise while others continue to fall, or that some segments of society see increasing wealth and income while others lose wealth and income. It can mean all three of these, or other possibilities.

Several different economic phenomena may be at work in driving a K-shaped recovery. First, a K-shaped recovery can reflect creative destruction in an economy described by economist Josef Schumpeter, which is when new technologies and industries replace older technologies and industries over the course of a recession. Second, it can reflect the public policy response to a recession in terms of monetary and fiscal policy, which can benefit some segments of the economy more than others. Lastly, it can simply reflect the differential impact that the initial recession had on different parts of the economy in the first place, especially when the recession coincides with or is triggered by negative real economic shocks that impact specific parts of the economy and can have lasting effects on them more than others. Note that these three may not be mutually exclusive; all three may be at play in a given K-shaped recovery, along with other factors.

Article Sources
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  1. Arthur F. Burns and Wesley C. Mitchell. "Measuring Business Cycles." National Bureau of Economic Research, 1946.

  2. Joseph A. Schumpeter. "Capitalism, Socialism and Democracy." Taylor & Francis e-Library, 2003.

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