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The concept of social exclusion implies that there is a downward spiral in which labour market marginality leads to poverty and social isolation, which in turn reinforce the risk of long-term unemployment. The evidence in favour of this view hitherto has been largely restricted to cross-sectional data that assess the degree of association between labour market position, poverty status and patterns of sociability. In this article we seek to test more rigorously the implied causal argument by exploring the relationship between these factors over time. The article first explores whether the transition from employment to unemployment heightens the risk of poverty and social isolation, and then turns to the issue of whether poverty and social isolation significantly affect the length of time it takes people to leave unemployment for a job. It draws on data from the European Community Household Panel, which provides longitudinal data for most of the EU member states, for the period 1994 to 1996. The article concludes that there is strong evidence that poverty contributes to a vicious circle of exclusion. Unemployment increases the risks of poverty and poverty in turn makes it more difficult for people to return to work. However, there is no clear support for the view that social isolation is directly caused by unemployment. Rather the risk of social isolation is contingent upon broader cultural patterns with respect to household structure and local sociability, which differ considerably between countries. Furthermore, there was no significant effect of any of the types of sociability studied on the time that it took people to re-enter employment. The article concludes that a concern for the implications of unemployment for social exclusion should focus primarily on the problem of poverty.