Reconsidering the effect of welfare stigma on unemployment

Stigma has been modeled in the literature as a cost of welfare participation, providing a disincentive to welfare entry; hence, traditional models predict that stigma leads to higher search effort and higher employment. We develop a more comprehensive model that accounts for the fact that welfare stigma may elicit psychological effects and foster negative attitudes towards welfare recipients, affecting their employment prospects. We find two contrasting effects. The first reinforces the standard prediction: rational individuals foreseeing the reduction in employability defer welfare entry (deterrence effect); the second goes in the opposite direction: once assisted, individuals experience less welfare-to-employment transitions, both because of reduced search effectiveness and of reduced search effort (entrapment effect). When stigma is not too high, the latter effect prevails: more stigma yields to less employment and more welfare participation. The result is stronger if individuals are not able to foresee their loss of employability.