Take the example of reduced marginal tax. While reducing this tax will increase real wages, it does not automatically mean that people want to work more. This is because the wage increase has two effects. Firstly, it makes work more profitable relative to leisure and thus contributes to wanting to exchange leisure for work. On the other hand, an increased real wage means that one receives a larger income for the same amount of work and this means one can afford more leisure. There are thus two counteracting effects. Purely theoretically, it is impossible to say what the net effect will be; empirical research must attempt to answer this question. Many empirical studies have been made in this field, for instance, at the time of the large tax reform in the beginning of the 1990s. The result of the studies is not unequivocal, but a common conclusion appears to be that the labour supply calculated in hours increased after the tax reform, although the size of the effect is much debated. Comparing different groups, the effect seems to have been relatively larger among women and relatively smaller among those with a low income and/or that work part-time. One complication with this kind of study is that the labour provided by many people is probably determined at household level rather than individual level. The labour force participation for an individual may also be affected by changes in their husband’s/wife’s/partner’s income.
Percentage of working age population in the labour force and degree of employment, level (left scale) and change (right scale) 1980-2003, per cent 3  100  2 1 0  90  -1 -2 80  -3 Percentage of working age population in labour force (LS)  Degree of employment (LS) Change in percentage of working age population in labour force (RS) Change in degree of employment (RS)  70  -4 -5 -6  1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002  Sources: Statistics Sweden and the Riksbank  10  BIS Review 64/2004  Figure 6. Percentage of people in work and the number of hours worked per person in work 1980-2003, index (1980=100) 104  104  102  102  100  100  98  Percentage of people in work  98  Hours per person in work 96  96  1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002  Sources: Statistics Sweden and the Riksbank  BIS Review 64/2004  11