Scarring

Economics.

1.

An adverse change in expectations about future economic conditions, leading to a persistent reduction in business confidence.

Confidence and negative shocks

"While the virus will eventually pass, vaccines will be developed, and workers will return to work, an event of this magnitude could leave lasting effects on the nature of economic activity.

Economists are actively debating whether the recovery will be V-shaped, U-shaped or L-shaped. Much of this discussion revolves around confidence, fear and the ability of firms and consumers to rebound to their old investment and spending patterns.

Our goal is to formalize this discussion and quantify these effects... we use a standard economic framework, with one novel channel: a “scarring effect.” Scarring is a persistent change in beliefs about the probability of an extreme, negative shock to the economy."

Kozlowski, Veldkamp and Venkateswaran. Covid Economics 8, 22 April 2020, p2.

2.

A broader group of adverse effects, also including disengagement of some job-seekers from the workforce.

Embedded unemployment

"... episodes of persistent high unemployment seem to become embedded for a period in a higher equilibrium jobless rate.

Moreover, when unemployment is high and job openings are scarce, discouraged job-seekers tend to become less engaged with the workforce such that participation falls, especially among younger and older age groups. A lengthy period of high unemployment would tend to exacerbate these adverse effects on equilibrium unemployment and participation, as well as leading to increased social deprivation.

The extensive range of government measures taken during the crisis may help limit these scarring effects."

Michael Saunders, External Member of the Bank of England's Monetary Policy Committee (MPC), May 2020.

Firm-specific knowledge and early retirement

"There are several ways in which the economy might be damaged [by Covid] including valuable firm-specific knowledge being destroyed by business closures, increased long-term unemployment and the associated loss in human capital, people moving into retirement earlier, etc.

This economic damage is often referred to as scarring."

UK House of Commons Library Briefing, 26 February 2021.

See also

• Bank of England
• Confidence
• COVID-19
• Creative destruction
• Depression
• Economics
• Equilibrium unemployment
• Human capital
• Hysteresis
• L-shaped recovery
• Monetary Policy Committee
• Labour participation rate
• Recession
• Shock
• U-shaped recovery
• V-shaped recovery