An often discussed effect of recessions is that they can have a silver lining by helping to shift resources in the economy towards more productive firms. Evidence from the Covid-19 recession suggests that this effect was present, with high-productivity firms experiencing smaller declines in employment than low-productivity ones. Government support policies, while dampening the recession, may offset this effect if they disproportionately benefit low productivity firms. The evidence suggests that this was the case during Covid-19, as lower-productivity firms were more likely to take up government support. 

For more details, see Kozeniauskas, N., P. Moreira, and C. Santos, 2021, “On the cleansing effect of recessions and government policy: Evidence from Covid-19”, Banco de Portugal Working Paper 18, forthcoming at European Economic Review.

Prepared by Nicholas Kozeniauskas, Pedro Moreira and Cezar Santos. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the Eurosystem.

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