Structural Unemployment, Underemployment, and Secular Stagnation

In this paper, we show that underemployment and not necessarily high unemployment becomes the main measure of economic slack under secular stagnation. Specifically, persistent underemployment occurs in the search and matching model, provided that households derive utility from holding wealth, and quickly dominates the total employment gap under stagnation. Wage and cost shocks can explain movements of unemployment and underemployment in opposite directions, while demand and supply shocks cause co-movements. Our analysis provides new insights into empirical puzzles such as Japan's seemingly decent employment record and the absence of wage pressures despite low unemployment rates after the Great Recession