ogical tax reform. In these models,

ogical tax reform. In these models, all unemployment is voluntary and, therefore, given the real wage, labour supply determines employment. As soon as we accept the existence of involuntary unemployment, employment is determined by labour demand, which is – given the real wage – below labour supply. Thus, a cut in real income can only lead to a reduction of notional labour supply. And while the (negative) output effect leads to a reduction of labour demand, the substitution effect should lead to an increase in employment. Thus, we have two contrary effects, and it is theoretically open which one dominates.4 Again, this can be shown graphically. In Figure 2, we have the same labour supply function LS as before. In the