High and persistent unemployment has presented a major challenge for the welfare state from two directions. First, it has eroded the funding base and second, it has increased the demands on welfare programs because of the consequences for poverty and inequality resulting from high unemployment. This paper explores these latter effects using a range of national and international evidence. It is argued that the effects, while generally presumed to exist, are complicated by the ways in which poverty and inequality are measured (on the basis of the economic status of families) and the growth in dual-earner families that has weakened the link between the economic status of families and individual family members. Despite this, there is strong evidence that unemployment increases the risk of poverty and contributes to inequality, and that it also gives rise to a series of debilitating social effects on unemployed people themselves, their families and the communities in which they live. This suggests a need for welfare reform to give emphasis to employment generation, but this should not be the only outcome by which the welfare system should be judged. The provision of an adequate and secure safety net that does not unduly distort incentive structures is also an important welfare objective.