Abstract. We regard individual unemployment duration as an important determinant of individuals’ welfare dependence. Welfare receipt is modelled for a unique data set of 4,655 Finnish unemployed individuals. A two-stage binomial hurdle model is applied, and estimations are made by both ML and GMM. Disregarding the full interrelation between unemployment and wel- fare clearly underestimates the importance of the former. Unemployment has a clear impact on both the probability of welfare participation and on welfare dependence among recipients. Using a finite mixture model we find that there is a small minority of unemployed welfare recipients who are ‘locked-in in welfare dependence’. JEL classification: I38, J64 Key words: Welfare receipt, unemployment duration, binomial hurdle model ‘‘Changes in employment and marital status are the two most important events associated with movements on and off welfare’’ (Hoynes 2000, p. 352). 1. Introduction Most empirical work concerned with labour supply effects of welfare transfers focus on by how much hours of work are reduced by means tested welfare J Popul Econ (2004) 17:409–431 DOI 10.1007/s00148-004-0194-1 All correspondence to Maria Melkersson. We thank participants at the ESPE 2001 conference, Joa˜o Santos Silva and two anonymous referees for valuable comments. Financial support from Rektorfo¨ r A ˚ bo Akademi is gratefully acknowledged (Saarela). Responsible editor: Junsen Zhang. Welfare participation and welfare dependence among the unemployed Maria Melkersson 1 , Jan Saarela 2 1 ITPS, Studentplan 3, 831 40 O ¨ stersund, Sweden (Fax: +46-63-16 66 01; e-mail: Maria.Melkersson@itps.se) 2 A ˚ bo Akademi University, 65100 Vasa, Finland (Fax: +358-6-32 47 45 7; e-mail: jsaarela@abo.fi) Received: 30 September 2002/Accepted: 14 January 2004