Unemployment Persistence: Is There Evidence for Stigma Effects?

We present evidence for a highly significant interaction between state dependence in individual unemployment risk and the business cycle. The disadvantage from having been unemployed in the previous period is smaller in times of relatively high unemployment and larger in times of low unemployment. This is consistent with the existence of stigma effects in the sense that unemployed individuals face difficulties finding a new job because employers interpret unemployment as a negative signal and do so especially when it is easier to find jobs, i.e. when unemployment is low.