My reading of things, and I can't think of a source that specifically addresses this right now, is that the average citizen was probably aware that things were harsh in the army or Gulag, but perhaps not aware of the extent of that. Anne Applebaum notes in her history of the Gulags that before the great purges and a change in tone/perception of 'enemies', the Soviet party-state actually promoted an idea that prison labour camps were a means of reforming criminals through hard work. So essentially people knew that the work at these locations were harsh, and they knew the locations were in harsh locations (eg. the artic circle) but they probably didn't know what the mortality rates were like and so forth. In terms of the army I'm guessing the citizenry would have assumed it would be harsh, and the drives/privations explained as necessary to help the troops at the front would by association suggest things were tough there. I'm also guessing one way or another the word of conditions in the army would filter back to the general population.

As to why someone would volunteer to join the Soviet army, well it was WWII, so they would probably figure they were going to be conscripted anyway. Then there is of course patriotism - you might not even like the Communist government that much but that didn't mean you were willing to let the Germans invade. Quite a few citizens pre-war would have volunteers to do reserve-style training for the military through DOSAAF/OSOAVIAKhIM. Then of course you have the classic social pressure element of signing up - if your friends have all signed up or your neighbours/family/whatever expect you to, it is hard to say no.

Being punished by being sent to the Gulag might not have actually been the 'incentive' you've assumed. For example Gulag prisoners could volunteer to serve in penal units on the front in exchange for reduced sentences. Applebaum notes that an appeal to patriotism was reasonably effective in drawing recruits in this way. Fyodor Mochulsky from memory noted similar appeals to patriotism to the prisoners in his book Gulag Boss.