Unknown. Erb's palsy is an injury to the nerves of the neck/shoulder that results in weakness of certain muscles of the arm and shoulder. Why 75-90% spontaneously recover without lasting problems while others have prolonged impairment is not well understood. There is, therefore, no consensus regarding the timing or utility of various therapies (particularly surgery) in those for whom it persists.
Degree of insult. If the stretch that causes the initial symptoms is just enough to cause the nerves to swell, that swelling will cause symptoms for a while but resume normal function as the swelling goes down. If the stretch actually tears the nerves, the degree of long term difficulty will be proportional to the intensity of the injury.