Long-Term Impacts of the COVID-19 K-Shaped Recovery - Investopedia

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The COVID-19 pandemic recovery has been fractured and uneven. Millions of Americans remain unemployed, while the wealthiest have grown their fortunes—reinforced by a strong stock market. As these divergences expand, the term "K-shaped recovery" has emerged. Specifically, it describes how different areas of the economy have recovered at varying speeds.

As a "K" letter shape denotes, some sectors have lagged or declined, such as hospitality and leisure, while the opposite is true for tech. Perhaps most importantly, a K-shaped recovery appears to have structural effects on the economy. Inequality is rising, employment is stagnating for many, and technological adoption is accelerating.

Here’s how a COVID-19 K-shaped recovery has impacted the economy and its potential long-term implications for the future.

Key Takeaways

The COVID-19 K-shaped recovery is defined by certain sectors recovering quickly, while others continue to lag.
Long-term implications of a K-shaped recovery include long-term unemployment among people in the lowest income quintile, wealth inequality, a continuing and worsening racial wealth gap, and growing corporate monopolies.
A K-shaped recovery is affecting the nature of work—as innovation and tech adoption accelerate, more people are being managed by automation and algorithms.
As seen in previous recessions, persistent unemployment may result in a K-shaped recovery, especially for people in low-income quintiles.

The Different Types of Economic Recovery

A number of different shapes of recovery can follow a recession. For instance, a V-shaped recovery is one where a steep decline is followed by a sharp rise.

In a U-shaped recovery, on the other hand, the economy lags over a number of quarters before bouncing back.

The worst offender is the L-shaped recovery, which is marked by an extended period of lackluster growth. In this case, recovering back to previous levels can take years. The Lost Decade in Japan is one example of an L-shaped recovery.

A K-shaped recovery occurs when some segments of the economy experience a V-shape recovery, such as large corporations, while others experience an L-shape, such as the service sector.

Long-Term Unemployment

The K-shaped recovery resulting from COVID-19 has been particularly hard on low-income workers, who are more likely to be employed in the economic sectors that were hit the hardest. Employment rates among people earning under $27,000 annually are 21% lower than pre-pandemic levels as of July 2021. By contrast, people earning more than $60,000 annually have seen employment levels increase 9.6% during this time frame. Even at the height of the COVID recession, employment rates among low-income workers declined 37.7%. For those earning over $60,000, the drop was just 13.3%.

According to a Bureau of Labor Statistics study, industries including leisure and hospitality, education and health, and information were among the hardest hit in employment loss for low-income workers. Many of these sectors pay below the national average. By comparison, areas that proved resilient were technology and government-based jobs.

Additionally, among the lowest-wage employees who were unable to work due to the pandemic, only 36% had access to health insurance through employer-sponsored benefits. The leisure and hospitality sector, for instance, covers hotels, restaurants, arts venues, and recreation, among others.

In addition to the K-shaped recovery by industry, there also seems to have been a K-shaped recovery by income. The recovery negatively impacted not only certain sectors, but the lowest-paid employees within all sectors. The rate of recovery for low-wage workers overall was significantly slower than for high-wage workers and presented fewer employment opportunities.

This is likely due to the fact that many low-income jobs found in distressed sectors couldn't be performed remotely. In fact, 74% of low-wage establishments were unable to offer remote work to their employees, while high-wage establishments offered it at a rate of four times more. Just as sectors such as tech and government are more likely to cover health insurance, they were also more likely able to offer remote work opportunities.

People of color, women, and undocumented immigrants were hit hardest by the economic issues. A 2020 study by the National Bureau of Economic Research showed that between February and April of 2020, there was a 41% drop in the number of Black business owners, a 32% drop in Latinx business owners, and a 26% drop in Asian business owners; White business owners suffered the lowest drop at 17%.

Research shows that recessions can cause significant earnings displacement over a lifetime for lower-income workers. Even during the subsequent expansions, these losses in hours and earnings were not recovered among the lowest income quintile across the last 52 years. For these reasons, the unemployment picture may have persistent effects.

Increasing Wealth Inequality

As the recovery continues, it’s impossible to overlook the growing wealth divide. Throughout the pandemic, U.S. billionaires have grown their wealth by $1.8 trillion as of August 2021. According to French economist Gabriel Zucman, wealth inequality today has surpassed levels seen in the Gilded Age of the 19th century.

Wealth inequality has been supported by soaring stock market gains. Following March 2020 lows, the S&P 500 recovered in record time, and has subsequently gained 95% in the 18 months that followed. In 2021, the wealthiest 10% of Americans own 89% of stocks and mutual funds.

Compounding this effect is federal stimulus, which has injected trillions of capital into the economy. Included in this plan is the purchase of $120 billion in Treasury bonds and mortgage-backed securities monthly to boost lending and stimulate the economy. These actions have spurred investor confidence and stock market gains.

Thanks in part to the low-interest-rate environment, the housing market has also thrived, further benefiting the wealthiest. In 2020, 842,000 existing home sales took place— the highest since 2006. According to the Federal Reserve, the top 10% wealthiest own 45% of U.S. real estate. While this is good news for people currently owning real estate, it offers a different picture for those struggling to break into the housing market.

Meantime, the pandemic worsened housing instability for renters, particularly renters of color. Eviction moratoriums offered temporary relief, but did not solve the structural inequities. Adding to the difficulty of keeping up with rent: People of color experienced disproportionate levels of unemployment. As an April 2020 Pew study reported, roughly 61% of Hispanic respondents said that someone in their household had lost a job, as had 44% of Black adults and 38% of White adults.

Growing Corporate Monopolies

A direct consequence of the pandemic was a shift toward remote work. Not only did this accelerate technological adoption, but boosted the demand for tech-related products and services.

One prime example of this is Zoom (ZOOM), which saw explosive growth as video-conferencing became more critical during periods of social distancing. The broader result: the growing concentration of big tech monopolies, which even before the pandemic possessed considerable moats.

To put it in perspective, according to reporting, the market cap of Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL), and Facebook (FB) reached nearly 25% of the S&P 500 in 2021. In January of 2020, CNBC reported that the collective market cap stood at roughly 18% of the index.

Technology companies and large corporations also benefited from large government stimulus. For instance, the Federal Reserve extended $750 billion in credit to large corporate employers to help them retain employees. While small and medium-sized enterprises (SMEs) had government stimulus available to them, their growth wasn’t as pronounced.

This is especially problematic as SMEs are responsible for 44% of economic activity and create two out of three new jobs in America. As a lifeblood for innovation, SMEs play a key role in driving competition within an economy.

Given the growing presence of corporate monopolies (only accentuated by the K-shaped recovery) this has many implications for the future. Automation will likely increase, further creating systematic inequality.

Importantly, it will likely shape the nature of work. Where traditional work models enabled upward mobility, the current gig economy—in many ways powered by algorithms—does not offer the same advancement opportunities. This can be seen in companies like Uber or Doordash, where interactions are managed algorithmically for efficiency, with relatively few human managers directly managing employees, leaving no chance for the gig workers to advance further in their roles.

The Bottom Line

A K-shaped recovery is reinforcing structural trends that were emerging long before COVID-19 unfolded. But perhaps most troubling is the fact that low-income unemployment and wealth inequality could last for many years. This will only exacerbate the nation's longstanding racial wealth gap.

A shift in government spending could help with these effects. Trillions in proposed federal budget initiatives that focus on creating jobs and childcare spending could lessen the burden for American families. In fact, according to reporting by the New York Times, sustained proposed federal spending initiatives are the highest since the World War II era.

While the implications of the K-shaped recovery still remain uncertain, important political and social actions may also help shape the economy’s direction.

What Is a K-Shaped Economic Recovery and What Are Its Implications?

A K-shaped recovery is an economic recovery following a recession where only certain sectors, industries, or areas of the economy recover while others persistently lag. Among the implications of a K-shaped recovery are wealth inequality, greater corporate monopolies, a continuing racial wealth gap, and long-term unemployment for low-income workers.

What Is An Example of a K-Shaped Recovery?

One example of a K-shaped recovery is when certain sectors, such as tech or financial services, recover after a recession while others, such as hospitality and leisure, show sluggish growth. Each growth pattern resembles the diverging slopes of a letter "K."

Is a K-Shaped Recovery Bad?

It depends on how one looks at it. For the wealthiest and select number of sectors, a K-shaped recovery has proven beneficial so far. However, low-income workers, and sectors such as leisure, hospitality, and other services have faced considerable challenges with lasting implications.

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