recession was associated with 0.3 percentage point lower employment rates in 2015 (Yagan 2019). Following recessions, lingering uncertainty about future sales prospects may discourage firms from hiring (Baker, Bloom, and Davis 2016; Bloom 2009, 2014). Financial constraints may force the more indebted firms into greater job cuts in the event of demand drops (Giroud and Mueller 2017). Long spells of unemployment may discourage workers and erode the skills of the long-term unemployed (Ball 2009; Blanchard 1991; Blanchard and Summers 1987). Thus, the decrease in employment over a prolonged period after a recession tends to have adverse consequences for labor supply and potential output.

Investment and capital accumulation. Gross fixed investment typically falls more sharply in response to economic downturns than other components of GDP (Kydland and Prescott 1982). A recession can cause investors to reassess long-term growth prospects. A downgrade in growth forecasts could erode prospects of long-term returns on investment or risks around expected returns and, thus, discourage investment. Access to finance for investment may also become more restricted and discourage investment, especially for younger, more innovative, and riskier firms (Fort et al. 2013).<sup>13</sup> Reduced capital accumulation in a recession will directly reduce potential growth.

Total factor productivity. A collapse in investment growth not only directly reduces potential growth but also indirectly by slowing the adoption of productivity-enhancing embodied technologies and the reallocation of resources towards more productive uses (Dieppe, Kilic Celik, and Okou 2021; Syverson 2011). Workers losing their jobs during recessions may enter permanently lower-skilled career paths (Huckfeldt 2022). Skills mismatches between job market entrants and job requirements are larger during recessions than expansions and tend to be long-lasting, suggesting persistent productivity losses from such mismatches (Liu, Salvanes, and Sørensen 2016). Recessions are also likely to be associated with reduced spending on research and development, with negative consequences for the growth of TFP.

All three channels were at work during the recessions considered in this study (annex E). Five years after the average recession, TFP growth is estimated to have been 0.7 percentage point lower than it would have been without a recession and, in EMDEs, 0.9 percentage point lower (figures 10.A and 11.A). Investment growth declined steeply in the first year of the average recession and remained significantly lower five years later— 3 percentage points below what it would have been without a recession, both globally and in EMDEs (figures 10.B and 11.B).

The effect was somewhat shorter-lived for employment. Four years after the average recession, employment growth was about 0.7 percentage point lower than what it would have been otherwise. However, for EMDEs, this effect was no longer statistically significant by the fifth year (figures 10.C and 11.C). The absence of a longer-lasting employment response in EMDEs is, in part likely to reflect the large, flexible informal economies that help these countries absorb shocks to labor markets.

> 13 Similar lasting impacts of investment weakness have been shown for banking crises (Wilms, Swank, and de Haan 2018).

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