K-Shaped Recovery: Definition, K-Curve Chart Example, and Causes

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."
  • In a K-shaped recovery, some parts of the economy may experience strong growth while others continue to decline.
  • Unlike other letter-shaped descriptors focused 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 depends on the choice of how to disaggregate data across the economy.

Understanding a K-Shaped Recovery

The term "K-shaped" recovery gained prominence in 2020 and 2021 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 economywide macroeconomic aggregate variables like gross domestic product (GDP) 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.

K-Shaped Recovery

Image by Sabrina Jiang ? Investopedia?2022

While economic performance always varies across different parts of the economy, economists traditionally understood economic cycles of recession and recovery to be broadly correlated across 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 is 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.

Causes of a K-Shaped Recovery

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 as described by economist Josef Schumpeter, which occurs 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.

Alternatively, 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 affect specific parts of the economy and can have more lasting effects on them than on others. Note that these three conditions may not be mutually exclusive; all three may be at play in a given K-shaped recovery, along with other factors.

How Can Fiscal Policy Work During a K-Shaped Recovery?

Fiscal policy is applied when the government changes its taxation and spending to help steer the economy. During a K-shaped recovery, governments can selectively implement tax breaks and other incentives that target certain industries, leading those sectors to recover at a faster pace than those left unaffected by the policy measures. The government also can choose to spend on infrastructure or other projects that benefit a certain industry.

Was There a K-Shaped Recovery Following the COVID-19 Outbreak?

Some economists have pointed to the aftermath of the economic fallout due to the pandemic as resulting in a K-shaped recovery. For instance, the technology sector remained fairly robust amid work-at-home measures, teleconferencing, and lockdowns that kept people online and streaming. Likewise, parts of the health-care sector that worked on vaccines and treatments saw a boost. Meanwhile, service-based industries such as restaurants, travel, and hospitality took an outsized hit.

How Long Do Recessions Last on Average?

The U.S. has experienced 34 recessions since 1857, according to the National Bureau of Economic Research (NBER). They have varied in length from two months (February to April 2020) to more than five years (October 1873 to March 1879). The average recession has lasted 17 months, while the six recessions since 1980 have lasted less than 10 months, on average.

The Bottom Line

A "K" shaped economic recovery is one in which the performance across different sectors, industries, and groups within an economy varies considerably after a recession. This can happen for a number of reasons related to technological and structural change within an economy as well as responses to a recession by policymakers.

To fully characterize the dimensions of a "K"-shaped economic recovery requires using data to break down the economy into different sectors to better understand what has happened to individual segments and whether their fortunes have been improving since the recession began.

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

  2. McKinsey & Co. "Mapping Decline and Recovery Across Sectors."

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

  4. National Bureau of Economic Research. "U.S. Business Cycle Expansions and Contractions."

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