Welfare stigma with decreasing employability

We analyze the effects of income support on unemployment and welfare dynamics when stigma is attached to welfare provision. Stigma has been modeled in the literature as a cost of welfare participation; in this paper we analyze the effect of income support on unemployment and welfare dynamics by assuming that welfare stigma also leads to progressive loss of employability. Unemployment and welfare participation are studied under the cross-sectional and dynamic perspectives. While traditional models predict lower unemployment rates with welfare stigma, in our model unemployment rates follow a non-monotonic pattern: as a consequence, in addition to reducing take-up rates, welfare stigma may also contribute to increase unemployment.