Public holidays,tourism,and economic growth

Abstract

In this article, a mechanism supporting the existence of an inverted u-shaped relation between the number of public holidays and the growth of an economy is presented. The nonlinear relationship is originated by two forces within a Schumpeterian economy: On the one hand, as the number of public holidays grows, the total number of workers searching for innovation increases; on the other hand, as the number of days of recreation increases, the number of working days producing innovations decreases. The combination of these two forces generates the inverted u-shaped relationship. The hypothesized mechanism suggests the existence of an optimal number of public holidays for an economy.

Keywords

economic growth evolutionary model public holidays

The people with a 5-day week will consume more goods than the people with a 6-day week. […] People who have more leisure must have more clothes. They must have a greater variety of food. They must have more transportation facilities. They naturally must have more service of various kinds. This increased consumption will require greater production than we now have. Instead of business being slowed up because the people are ‘off work’, it will be speeded up…This will lead to more work. And this to more profits, and this to more wages. The result of more leisure will be the exact opposite of what most people might suppose it to be.

Henry Ford (1926, interview with World’s Work Magazine)

Introduction

In a sense, this article completes Henry Ford’s visionary explanation of how consumption related to days of recreation might affect the economy. While Ford shows that more days of recreation can speed up an economy, the explanation is completed with the statement that too many days of recreation could injure it.

Lord Amulree (1938) in his inaugural address of the Royal Society of Arts indicated that the paid days of recreation are a relatively modern phenomenon in the history of work and its acceptance by the employers came from the understanding of the positive effects they generate on workers and the economy. The rest that the paid days of recreation offer helps the economy through multiple mechanisms. They help to improve the quality of work to generate new ideas, to have healthier workers, and to improve the trust present in social networks. This article focuses on one additional mechanism: the effect that paid days of recreation have on the economy through the expenditure on tourism activity.

The paid days of recreations can be classified into three groups: legal paid vacations, public holidays, and weekend days. All of them contribute to increase spending on tourism activities with a different intensity. This article uses public holidays due to two features that distinguish them from the other two groups of paid days of recreation. First, and unlike legal paid vacations, most firms do not operate during public holidays, and all their workers have the probability of increasing their expenditure in tourism during an additional public holiday. Legal paid vacations are established by law or by agreements between employees and employers. The period in which they become effective is agreed between companies and workers. In principle, they can be made effective at any time of the year, and in general, companies try to organize the holidays of their employees to maintain operations. Second, the decision to have an additional public holiday day is an important public policy discussion, which often leads to senatorial debate.¹ The number of weekends does not require any type of discussion since they are determined and accepted in the calendar for all the households and organizations of the economy.

Spending on tourism during a public holiday is not independent of what is done during legal vacations. Taking into account that the budget of the households is fixed, there is an inverse relationship between spendings on public holidays and vacations. The greater the number of vacation days that an economy has, the greater the expenditure made by households during this period. Therefore, the lower the budget to be used in tourism activities during public holidays.

The hypothesis developed in the article is that an inverted u-shaped relation exists between the number of public holidays and the economic growth of an economy; that is, there is an optimum number of public holidays for economic growth. The main result of the article is the provision of a conceptual framework to think about the problem and to compute the optimum number of public holidays for an economy.

The basic mechanism involves two forces. On the one hand, public holidays have an effect on the economy because they allow workers to increase their expenditure on tourism. This expenditure increases the economic activity, augmenting employment, and eventually economic growth. On the other hand, too many public holidays lead to a reduction in work time, and this eventually reduces the production of the economy. The interaction of these two forces generates an optimal number of public holidays.

The document is organized into three additional sections to this “Introduction” section. In the next section, a review of the literature is developed. The revision proposes to organize the mechanisms highlighted in the literature that explain how the time of rest of public holidays affects economic growth. After the review, the model will be presented and the article is closed with a section with reflexions and conclusions.

Literature review

There are three generic mechanisms by which the rest time provided by public holidays affect the growth of an economy. First, the health-productivity channel. In this mechanism, public holidays increase the health and well-being of the workers, leading to higher labor productivity. Second, the social capital channel, where public holidays are beneficial to keep in touch with workers within a social network; thus, public holidays help to build social cohesion and social capital, which help in the growth of the economy. Third, the expenditure channel, where public holidays increase tourism demand, and this through the interaction of multiplier effects and constraints could lead to more production and growth.

The effect of recreation days on the health and well-being of workers has been widely described by Bloom et al. (2012), Dolnicar et al. (2012), and Fodranová et al. (2015). In this case, the role of leisure in labor productivity is to reduce the stress and strains of workers’ daily life. Marx’s hypothesis on the length of the working day is probably one of the oldest references in the wellness of workers’ channel. Marx sustains that long working days deteriorate human labor power, producing premature exhaustion and death. Therefore, shorter working days would benefit the capitalist society with a better quality of workers (see West, 1983). Gomez (2008) and Azariadis et al. (2013) introduced leisure time externalities in a Lucas (1988) type model to show that different degrees of preferences for leisure might be translated in different effects of economic growth. Xiang et al. (2015) build a neoclassical growth model where workers face a trade-off between leisure and working time, with an additional compensation effect that increase the productivity of working time when more leisure time is adopted. Although they do not find a positive effect of leisure on the economy growth of China, they sustain that the results obtained are conditioned by the stage of economic development of China.

The social capital mechanism presented by Jenkins and Osberg (2005) and Merz and Osberg (2006) argues that public holidays have a series of rites that unite people to celebrate the common symbolic meaning of each holiday. This generates an increase in social cohesion or social capital, which eventually leads to an increase in economic growth, as Knack and Keefer (1997) pointed out.

The expenditure channel works through the free time of public holidays which generates an increase in tourism demand. The tourism is eventually translated into the growth of the whole economy. Lord Amulree (1938) in the inaugural address of the Royal Society of Arts about the history of days of rest for the workers emphasize a historical close relationship between tourism and the consecutive days of holidays. Tourism economics textbooks of Burkart and Medlik (1981) or Vanhove (2011) indicate that among a myriad of economic, social, and political factors, the most important determinant of tourism demand is disposable income and free time.

Zhang et al. (2013) analyze the change in tourism demand that came as a result of the change in holiday policy that was followed in China for over 50 years. They show that the arrangement for the public holidays is important to generate more domestic tourism demand. Thus, not only the total amount of rest time is important but also the distribution of rest time across the time framework. For instance, researchers show that a compressed working week schedule produces decreased employee turnover intentions (Cohen, 1997), increased productivity and job performance (Lynch et al., 1999), and reduced job dissatisfaction and increased general health (Thomas and Ganster, 1995). These mechanisms affect workers’ welfare, and through them, leisure has an effect on different organizations of the economy.

In an extensive review of the tourism-led growth hypothesis, Brida et al. (2016) find empirical evidence that overall international tourism drives economic growth. De Vita and Kyaw (2016) use a large panel of 129 countries over the period 1995–2011 to show that tourism arrivals affect economic development positively as well. Albaladejo Pina and Martínez-García (2013, 2015) build mechanisms explaining how international tourism could increase economic growth. Our hypothesis challenges the empirical finding that only international tourism counts for economic growth and complements the theoretical exposition, postulating that, in a closed economy, within a general equilibrium setting, there is room for increasing the economic growth by adjusting the number of public holidays.

The model

Following the Schumpeterian structure of Aghion and Howitt (1992, 1997), the model abstracts from capital accumulation. In the economy, there are three classes of tradable objects: labor, consumption goods, and intermediate goods.

Households are represented as a continuous mass L. Their utility depends only on consumption, and they are risk neutral, so the representative household has the single objective of maximizing its expected consumption

u (y) = \int_{0}^{\infty} y_{τ} e^{- r τ} d τ

where r > 0 is the constant rate of time preference. Each household is endowed with a unit of labor service that is supplied inelastically, so L represents the aggregate flow of active workers.

The output of the consumption good depends on the input of intermediate good x, so the production of the economy can be represented by

y = A F (x)

where $F^{'} > 0, F^{″} < 0$ , y is the flow output of the consumption good, and A represents the productivity of the intermediate input.

Innovation takes the form of a new intermediate good that replaces the old one, the use of which raises the technological parameter A by a constant factor γ > 1. The most modern intermediate good is used for production, so after t innovations, the effect of the gain in productivity obtained from the intermediate good is $A_{t} = A_{0} γ^{t}$ .

The current labor supply has two competing uses: intermediate production and research, so

L = n + x

where n is the labor used in research and x is the labor used in manufacturing to produce the intermediate goods one by one.

The research sector produces innovations, and the more labor is assigned to the sector, the higher the probability of producing a new product. Indeed, innovations arrive randomly with a Poisson arrival rate λn, where λ > 0 is the productivity of the research technology.

All the markets are perfectly competitive except that for intermediate goods. In this market, a successful innovator obtains a patent, which enables him to monopolize the intermediate sector. It is assumed that innovations are always drastic and that intermediate monopolists are unconstrained by potential competition from the previous patent.

The profit of the intermediary from the innovation t is given by

π_{t} = p_{t} (x) x - w_{t} x

and he chooses x to make it optimum. Exploiting his condition as a monopolist, the intermediary sets the price equal to the marginal productivity of the final good production. Thus

p_{t} (x_{t}) = A_{t} F' (x_{t})

Replacing this in equation (4), the value of x that makes the profit optimum can be expressed as a function of the productivity-adjusted wage, $ω_{t} = \frac{w_{t}}{A_{t}}$ .

Aghion and Howitt (1992) assume that the marginal revenue is downward-sloping and satisfies Inada-type conditions:

Assumption 1

$\tilde{ω}' (x_{t}) < 0$ , for all $x < 0, lim_{x \to 0} \tilde{ω} (x_{t}) = \infty and lim_{x \to \infty} \tilde{ω} (x_{t}) = 0$

Consequently, the number of workers that makes the profit of the intermediary firm optimal can be expressed as
$x_{t} = \tilde{x} (ω_{t}) or ω_{t} = \tilde{ω} (x_{t})$
5

with $\tilde{x}' (ω_{t}) < 0$ and the flow of monopoly profits
$π_{t} = A_{t} \tilde{π} (ω_{t})$
6

with $\tilde{π} (ω_{t}) = - {(\tilde{x} (ω_{t}))}^{2} F^{″} (\tilde{x} (ω_{t})) and {\tilde{π}}^{'} (ω_{t}) < 0$ given that $\tilde{x}$ is decreasing in $ω_{t}$ .

At the margin, a worker should be indifferent between research and manufacturing. That is
$w_{t} = λ V_{t + 1}$
7

where the subscript t counts the number of innovations, w_t is the wage in the manufacturing sector during the innovation t, and $V_{t + 1}$ is the discounted expected payoff of the (t + 1)th innovation.

The value $V_{t + 1}$ is determined by the following asset equation
$r V_{t + 1} = π_{t + 1} - λ n_{t + 1} V_{t + 1}$
8

The society of this economy has to decide how to allocate the mass of workers L between manufacturing and research. The problem can be exposed formally using equations (7) and (3)
$ω_{t} = λ \frac{γ \tilde{π} (ω_{t + 1})}{r + λ n_{t + 1}}$
9

and
$L = n_{t} + \tilde{x} (ω_{t})$
10

Aghion and Howitt (1992) prove that, for this system, there is a unique stationary equilibrium $\hat{n}$ that solves the system. In this equilibrium, the final output during the time interval between the t and the t + 1 innovation is $y_{t} = A_{t} F (L - \hat{n})$ . Given that the allocation of labor remains the same across all the innovations, the increase in the production after the t + 1 innovation can be expressed as $y_{t + 1} = γ y_{t}$ .

The time path of the real output $ln y (τ)$ is a random-step function starting at $ln (y (0)) = ln F (L - \hat{n}) + ln A (0)$ , with the size of each step given by $ln γ > 0$ . The time between each step or two successive innovations is random and given by a sequence of iid variables exponentially distributed with parameters $λ \hat{n}$ . During a period T, the expected number of innovations will be $T λ \hat{n}$ .

Thus, the expected economic growth in the period T is determined by
$E [ln y (τ + T) - ln y (τ)] = T λ \hat{n} ln γ$

Notice that, as the productivity of the research sector λ increases, or the bigger the gain in productivity γ, or the higher the number of researchers in equilibrium $\hat{n}$ , the greater the economic growth during the period T.

So far, the model and the results presented are a simplified version of Aghion and Howitt (1992). In the following section, the public holidays will be introduced and their effect on the model will be analyzed.

Public holidays and the employment multiplier

As will be made clear later, the introduction of public holidays into the economy is rich in implications for the model of the article. In this section, the basic assumptions for explaining the effect of public holidays on the economy are analyzed. These assumptions are the bases for the mechanism through which the public holidays will influence the economy.

Assumption 2

In the economy, there are always households that are willing to go out on public holidays and make expenditures as the number of public holidays increases.

Assumption 3

As the number of public holidays increases, fewer households go out on holidays.

These two assumptions establish a critical property of the expenditure on tourism during public holidays. If the number of public holidays increases, households increase their expenditure but eventually run out of budget, and this shows diminishing returns of the tourism expenditure to the accumulation of public holidays.

Assumption 4

A proportion ρ with 0 ≪ ρ ≤ 1 of the tourism expenditure made by households is domestic.

According to the World Tourism Organization, domestic tourism is the first form of tourism. It is estimated that 83% of the tourist arrivals corresponded to domestic tourism during 2008.² This is a critical assumption of the model, because the article is concerned with public holidays; therefore, tourism outside the country is less probable. Households have to make expenditures in the tourism sector within the country.

Assumption 5

The economy is not in full employment.

In this sense, the model is consistent with the post-Keynesian assumption that in general neither capital goods nor labor is fully employed (Lavoie, 2015: 24) or the assumption of the existence of a labor surplus by Enke (1962) and Lewis (1954). The economic problem in the post-Keynesian paradigm is how to increase production instead of how to allocate goods. It is generally possible to increase the rate of utilization of capacity, and there are reserves of labor. This means that, in the economy of this article, it is possible to increase L by increasing the production.

Assumption 6

The tourism sector is labor-intensive; therefore, as the activity increases, it always produces an increase in the labor participation of households.

This assumption is based on information from the International Labour Organization (UNWTO-ILO, 2014). Accordingly, the tourism sector is among the top job-creating sectors because of its labor-intensive nature.

Assumptions 2 to 4 link public holidays to the expenditure on tourism of the country, and the next two assumptions turn the expenditure into an increase in the labor supply in the model.

Formally, these five assumptions allow the expression of the effect of the number of public holidays as
$\tilde{L} = L ϕ (h)$

where ϕ(h) is the employment multiplier to the public holidays.

The tourism employment multiplier has been measured for a variety of tourist destinations and using different techniques. The sophistication of the techniques ranges from Archer’s (1975) proposal to the more sophisticated methods using satellite accounts, input–output matrices, social accounting matrices, or general equilibrium models (Gül and Çaǧatay, 2015; Klijs et al., 2012; Poonam, 2013).

The multiplier in our model is analyzed within a general equilibrium model considering only domestic tourism. Haddad et al. (2011) show that, considering only domestic tourism, the tourism multiplier for the north of Brazil is lower than the multiplier considering the effect of foreign tourism.

The tourism employment multiplier can have different effects across countries. Besides the artefacts related to multiplier measurement techniques (Crompton et al., 2015), it is assumed that these differences depend on four macro-components: first, the inventory of tourist destinations of country K; second, the average expenditure that households can allocate to tourism e; third, the number of legal paid holidays l available; and finally, the transaction costs C related to engaging in domestic tourism in the country. The transaction cost for domestic tourism can increase for a variety of reasons. First, the distribution of public holidays during the weeks can increase the transaction cost. If the public holiday is on Wednesday, the transaction cost for tourism is higher than if the public holiday is on Friday or Monday. Second, if there is no information about the tourist destination, the transaction cost of tourism is higher. Third, if the infrastructure for supporting tourism is poor, the transaction cost is higher. Fourth, when the social and political forces of the country are more stable, the transaction cost of tourism is lower.

Thus, the public holiday multiplier can formally be expressed as $ϕ (h, K, e, l, C)$ , with ϕ(0,·) = 1, $ϕ_{h} > 0, ϕ_{h h} < 0$ y ϕ(h,·) > 1, for $0 < h < T$ . As the number of tourist destinations of the country increases, the multiplier has a greater impact $ϕ_{K} > 0$ . If households can make bigger expenditures, the multiplier $ϕ_{e} > 0$ is bigger. If households have available many days of vacations, the multiplier $ϕ_{l} < 0$ will be lower. Finally, the transaction cost of engaging in tourism in the country is associated with the availability of infrastructure, transport, and institutional stability across the country. More infrastructure, transport, or stability means lower transaction costs of tourism. In other words, $ϕ_{C} < 0$ .

The introduction of public holidays into the economy

In the model, there is an authority that decides the number h of public holidays during the period of T days, with h < T. It is reasonable to think of T as the number of days of the year. Thus, as the number of holidays h increases, two things happen. On the one hand, the population increases its expenditure on tourism; therefore, there are more active people in the labor market. On the other hand, the number of holidays reduces the working days; therefore, the number of days worked during the period T becomes (T − h). Assuming that K, e, l, and C remain constant, this affects the people who are active in the labor market, so the mass of workers is now given by $L ϕ (h)$ .

This change in the mass of workers does not affect the arbitrage equation (9)
$ω_{t} = λ \frac{γ \tilde{π} (ω_{t + 1})}{r + λ n_{t + 1}}$
11

However, it does change the labor market clearing equation (10) to
$\tilde{L} = n_{t} + \tilde{x} (ω_{t})$
12

In equilibrium, $ω = ω_{t} = ω_{t + 1} and \hat{\hat{n}} = n_{t} = n_{t + 1}$ . Considering that ${\tilde{x}}^{'} (ω_{t}) < 0 and \tilde{π}' (ω_{t + 1}) < 0$ , perfect foresight dynamic and balanced growth can be obtained.

Once the authority has selected the value of h, the problem of determining the equilibrium can be expressed as
$ω_{t} (\tilde{L} - n_{t}) = λ \frac{γ \tilde{π} (ω_{t + 1} (\tilde{L} - n_{t + 1}))}{r + λ n_{t + 1}}$
13

where the marginal benefit in the manufacturing sector is $c (n_{t}) = ω_{t} (\tilde{L} - n_{t})$ and the marginal benefit of research $b (n_{t + 1}) = λ \frac{γ \tilde{π} (ω_{t + 1} (\tilde{L} - n_{t + 1}))}{r + λ n_{t + 1}}$ . Notice that if $c (0) < b (0)$ there are incentives for workers to move from manufacturing to research.

This means that a value $\hat{\hat{n}}$ exist that solves the system. The value of $\hat{\hat{n}}$ increases (a) when the rate of interest decreases; (b) when the size of each innovation γ increases; and (c) when the productivity of the research sector λ increases. Finally, (d) as the number of public holidays increases, there is an increase in the total number of workers in the labor market, and this translates into an increase in $\hat{\hat{n}}$ . Formally, (d) can be expressed as $\hat{\hat{n}} = g (h)$ , where g is a continuous function in $0 \leq h \leq T, g^{'} (h)$ > 0, and g″ (h) < 0.

The effects of (a) and (b) are explained because both increase the marginal benefit to research. The effect of (c) is the result of the interaction of the reduction in the value of the innovation due to the creative destruction effect of $λ n_{t + 1}$ and the increase in the productivity of conducting research, with the last effect dominating the first one. Finally, when the number of public holidays increases, $\hat{\hat{n}}$ increases, because the labor produced by the greater number of public holidays increases the marginal benefit and reduces the marginal cost of research by reducing the wage of the research labor.

With these results, the expected number of innovations during the period 0 to T, when there are h number of public holidays in the economy, is defined by
$I = (T - h) λ g (h)$

Therefore, the expected growth in the period T is given by
$E [ln y (τ + T) - ln y (τ)] = (T - h) λ g (h) ln γ$

Proposition 1

Assuming that the elasticity of the number of workers in the research sector to the public holidays is strong enough that $\frac{g^{'} (0)}{g (0)} > \frac{1}{T}$ , there is a number of public holidays h* that maximizes the expected growth of the economy $E [ln y (τ + T) - ln y (τ)]$ .

The first-order condition of the expected growth can be expressed as
$(T - h) g' (h) - g (h) = 0$
14

This condition is positive for h = 0 and negative for h = T. Therefore, there is a value of h = h* at which the first-order condition becomes 0.

The second derivative $T g^{″} (h) - h g' (h) - g (h) < 0$ for all the possible values of h. Therefore, the optimal number of public holidays h = h* produces the maximum expected growth rate.

An example

It is illustrative to show the existence of an optimal number of holidays for one specific case. Suppose an economy where the final goods are produced using a production function, which satisfy the assumption of our model like
$y_{t} = A_{t} x_{t}^{α}$

Notice that $F_{t}^{'} = α A_{t} x_{t}^{α - 1} > 0 and F_{t}^{''} = (α - 1) α A_{t} x_{t}^{α - 2} < 0, for 0 < α < 1$ and the measure of technology $A_{t} > 0$ .

In this case, the optimum production of the monopolist becomes
$x_{t} = {(\frac{α^{2}}{\frac{w_{t}}{A_{t}}})}^{\frac{1}{1 - α}} = {(\frac{α^{2}}{ω_{t}})}^{\frac{1}{1 - α}}$

and the profit
$π_{t} = A_{t} (\frac{1}{α} - 1) (\frac{w_{t}}{A_{t}}) x_{t} = A_{t} (\frac{1}{α} - 1) ω_{t} x_{t}$

which are the representations of equations (5) and (6) above.

The equilibrium of the economy is given by the system of equations (11) and (12)
$w_{t} = λ \frac{γ π_{t}}{r + λ n_{t}}$

$L ϕ (h) = n_{t} + x (w)$

where ϕ(h) is a function capturing the effect of the employment multiplier to the public holidays.

The number of workers in the sector of innovations in the period T with h holidays will be
$\hat{\hat{n}} = \frac{γ \frac{1 - α}{α}}{1 + γ \frac{1 - α}{α}} L ϕ (h)$

Thus, the expected number of innovations during the period 0 to T, with h number of holidays, will be
$I = (T - h) λ \hat{\hat{n}}$

Besides the public holidays, the employment multiplier $ϕ (h, K, e, l, C)$ depends on tourist destination K, the expenditure in tourism made by the households e, the number of legal paid vacations available for households l, and the transaction cost of engaging in tourism activities C. It is assumed an employment multiplier defined as $ϕ (h) = h^{μ (K, e, l, C)}$ , where the elasticity μ(·) is assumed to be dependent on K, e, l, and C.

With this definition, the optimal number of public holidays will be the number of days that maximizes the number of innovations given by
$I = (T - h) λ \frac{γ \frac{1 - α}{α}}{1 + γ \frac{1 - α}{α}} L h^{μ (\cdot)}$

and this is equal to
$h^{*} = \frac{μ (K, e, l, C)}{1 + μ (K, e, l, C)} T$

The example shows an important property of the model: the greater the impact of the tourism sector on the labor market, the higher the number of public holidays that is optimal for economic growth.

According to the assumptions made above, $μ_{K} > 0, μ_{e} > 0, μ_{l} < 0, and μ_{C} < 0$ . Therefore, when the number of tourist destination K is greater, or the expenditure e of the population in tourism is greater, the optimal number of public holidays is higher. On the other hand, when the number of legal paid vacation days l increases or the transactional costs C for doing tourism increases, the optimal number of public holidays for the economy is lower.

Discussion

The model developed in the article proposes an optimal number of public holidays as a consequence of the interaction of two forces. On the one hand, as the number of public holidays increases, there are fewer days to work; therefore, the economic growth is negatively affected. On the other hand, as the public holidays increase, the expenditure on domestic tourism increases as well. This activates more resources to increase the innovations during the working days, and in turn, this enhances the economic growth of the economy due to the greater number of innovations.

The interaction of the two forces in its reduced form is represented in the first-order condition (14), which can be expressed as $g^{'} (h) / g (h) = 1 / (T - h)$ . This condition states that the higher the elasticity of the employment of the research sector to the public holidays, the higher the number of public holidays that produces the optimal rate of growth for the economy.

There are two policy implications to be taken into account. The first recommendation is associated with determining the optimal number of public holidays an economy should have. This decision should take into account, on the one hand, that public holidays improve the quality of workers and that they help in the formation of social capital. On the other hand, and this is the one that matters most in this article, holidays make households spend more money on tourism, and the tourism sector in return generates more economic activity for the entire population. The most important instrument suggested by this article to find the optimal number of holidays is the elasticity of employment on public holidays. The work of Haddad et al. (2011) represents a strategy to compute an approximation of the elasticity. This information allows to assess the effect of domestic tourism in the local economy.

The second recommendation is that whenever a change in the tourism sector is implemented in the economy, this translate into a modification of the elasticity. The elasticity depends on K, e, l, and C. Thus, countries with many tourist destinations or with households with high expenditure on tourism or few days of legal paid vacations, or lower transaction costs should have more public holidays than other countries. This suggests that the optimal number of public holidays is different for each country according to the characteristics of the tourism sector of the economy. Moreover, as K, e, l, or C change over time, the optimal number of public holidays for an economy could also change over time.

Although the hypothesis developed in this article sustains the existence of an optimal number of public holidays, it is important to establish that the real computation of such an optimal number of public holidays might be a hard task due to the information requirement. The main result of the article suggests that the optimal number depends on variables with different degrees of complication in their measurement. The likely transaction cost is the hardest concept to measure out of the three concepts described as being relevant to computing the elasticity of the workers in the research sector to the public holidays.

The mechanism of the article works in the long run. The policy maker cannot use public holidays as a counter-cyclical instrument to expand or contract the economy in the short run. During the contractive (expansive) phase, the expenditure e of households is reduced (increased); therefore, the effect of the tourism multiplier $ϕ (h, K, e, l, C)$ is lightened or neutralized.

Conclusion

This article has presented a model to analyze the effects of public holidays on an economy. The model develops the mechanism underlying the hypothesis that there is an optimal number of public holidays that facilitate the optimum economic growth. In a Schumpeterian model of economic growth, the search for innovation that feeds the process of creative destruction is made by two forces. On the one hand, there are workers conducting research, and on the other hand, the work is carried out on the many days that compose the year. A public holiday on the one hand reduces the number of active days searching for innovation, and this tends to reduce the economic growth, while, on the other hand, the public holidays increase tourism expenditure, and this increases the number of people searching for innovations. These two forces interact to produce the optimal number of public holidays for the economy.

The model is simple in the exposition of the mechanism that produces the inverted u-shaped relationship between public holidays and economic growth. It provides a structure to organize the analysis for the policy maker. The general message of public policy is that the countries that offer a great variety of tourist destinations for domestic tourism or where the expenditure capacity of the households is high or with few vacation days or where the transactional cost is low should have more public holidays. Moreover, when the rate of utilization of the factors in the economy of a country is low, the policy maker should consider increasing the number of public holidays.

Future research should make an effort to calculate the sensitivity parameters that give rise to the tourism multiplier. These calculations should take into account the opportunity cost of having an additional holiday. The work by Haddad et al. (2011) is a good advance on the appropriate type of question that should be asked using the available data in the country.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes

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