Real wage is an indicator of "true" wages because it takes into account inflation, which tends to reduce the value of wages. Mathematically, it is the ratio of wages over prices. An increase in real wages increases the cost of not working -- every hour spent on leisure could have been utilized to earn income. This is an example of substitution effect taking over the income effect.
A reduction in prices and tax rates tends to increase the labor supply by affecting real wages. Since lower prices and taxes mean that real wages rise, the cost of not working -- the opportunity cost of leisure -- also rises. The increase in labor supply is explained by the theory that when tax rates go down, workers feel motivated to work harder because they are allowed to keep a larger fraction of their income. Conversely, an increase in prices and tax rate has the opposite effect of decreasing the labor curve.
No discussion of labor supply is complete without the backward-bending labor supply curve. The shape of the curve depicts a situation in which an individual's wages are so high that he chooses to forgo extra income and chooses leisure over work. This is an example of a situation where the income effect is larger than the substitution effect. Although the supply curve does not bend at lower wages, extremely high wage earners may be expected to increase their consumption of leisure and decrease their labor supply: Consider, for example, what you would do if you won the lottery. This example illustrates the backward-bending labor curve.
An increase or decrease in the labor supply curve denotes movements along the curve. There are, however, factors that cause the curve itself to shift outward or inward. For example, when women entered the workforce, the labor supply curve shifted out -- there was more labor supplied at every wage rate. Immigration and emigration both affect the supply curve by increasing and decreasing the size of the labor pool. Similarly, population growth and demographic change also cause the supply curve to shift.