The municipalities' costs for social assistance are expected to grow by over 20 per cent in the coming years (Prop. 2018/19:1). There are plenty of studies of how the design and level of unemployment insurances affect labor market outcomes – higher benefits have a negative impact on annual income and wages after unemployment – but few concerning the social assistance system.

For recipients of social assistance, the benefit is reduced by the same amount a person earns, which create weak incentives for work as the substitution effect remains neutral. As a measure to lower the effective marginal tax rate from a hundred percent, Sweden has introduced a claw-back tax: the so-called job stimulus.

Labor supply models assume voluntary unemployment, where the incentives depend on the fixed costs of working. If the fixed costs remain neutral, everyone who has a potential income over the benefit limit should work. However, under 2 per cent receive the job stimulus, even though approximately 50 per cent meet the eligibility requirements (Socialstyrelsen, 2016). Therefore, this thesis investigates potential explanations to this lag between theory and reality, analyzing a specific policy using traditional analysis tools from the economic theory of labor supply.

The results show that the effective marginal tax rate is significantly affected, which strengthens the assumption that traditional analysis tools for labor supply seem insufficient when studying social assistance. Therefore, the effort model is introduced as an analysis tool to complement the established theories.