## CANCELLATION OF A PUBLIC HOLIDAY IN DENMARK

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### A. Introduction
- Denmark faces demographic headwinds that challenge maintaining high rates of growth; increasing labor supply is a policy goal.
- Potential policies to increase labor supply: higher labor force participation and lower structural unemployment (extensive margin); increasing the retirement age and tilting labor-leisure balance including annual holidays and personal leave days (intensive margin).
- Denmark decided to cancel Store Bededag (Great Prayer Day). Decision approved by parliament in February 2023 and effective in 2024.
- Store Bededag is celebrated on the third Friday after Easter (always on a weekday); its cancellation implies an increase in annual statutory working hours by 0.45 percent.
- Tripartite agreement: employees with monthly salary contracts receive a 0.45 percent increase in annual salary; hourly contract workers (about 20 percent of employment) will be compensated according to hours worked on the new working day.

### B. Estimating the Expected Impact on Labor Supply
- Two complementary approaches used to estimate impact:
  - Historical correlation between agreed and actual work hours in Denmark (the “norm effect”).
  - Cross-country empirical literature on causal effect of public holidays on economic growth.

Using a “Norm effect” Estimate
- “Norm effects” can influence whether workers actually increase hours following a statutory increase; social coordination and transaction costs matter.
- Ministry of Finance estimate: correlation between statutory and actual annual working hours in Denmark has been around 0.75 since the 1980s.
- Based on a 0.75 correlation, a 0.45 percent increase in statutory work hours predicts a 0.34 percent increase in actual work hours.
- Caveat: historical norm estimates are based on a long-term trend toward more leisure; expecting symmetric application when reversing the trend may be optimistic.

Using Results from Empirical Literature on Causal Impact of Public Holidays on Growth
- Rosso and Wagner (2022) estimate a statistically significant working-day elasticity of GDP of around 0.2 using exogenous calendar variation.
- Mapping that to labor supply with Denmark’s labor share of 2/3 implies an elasticity of labor supply of 0.3, giving a 0.45 percent statutory increase → 0.14 percent increase in actual work hours.
  - Calculation in source: 0.2*2/3=0.3; 0.3*0.45=0.135 percent (reported as 0.14 percent).
- Two factors affecting applicability:
  - Calendar variation does not alter wages, whereas cancellation of Store Bededag includes wage compensation for the extra workday (likely increasing demand-side multiplier via higher propensity to consume from labor income).
  - Calendar variation is transitory; cancellation is permanent and may prompt households to claw back leisure over time.
- Near-term expectation: wage-compensation effect likely dominates, so labor supply impact may be larger than 0.14 percent.

Demand-side Effects
- Domestic tourism spending is used as a proxy for consumption related to a public holiday.
- Share of domestic tourism spending in Denmark was 3.4 percent in 2019.
- Foregone domestic tourism spending from the holiday could imply an impact between 0.01 and 0.06 percent of GDP (simple calculation: 3.36/52 =0.06 upper bound; 3.36/365=0.01 lower bound).

Summary Estimate
- Cancellation of Store Bededag expected to increase labor supply by around ¼ percent (0.14–0.34 percent).
  - Upper bound: 0.34 percent (historical correlation approach).
  - Lower bound: 0.14 percent (cross-country empirical literature).
- Ambiguity about long-term vs short-term impact: households may claw back leisure over time, but norm effects could solidify, making long-term effect ambiguous.

### C. In Comparison: Other Channels to Increase Labor Supply
- Purpose: compare alternative channels that could yield similar magnitude increases in labor supply (illustrative calibrations, not policy prescriptions).

Incentivizing Longer Hours Worked
- Average hours worked per employed in Denmark around 34 hours per week.
- Reasons for relatively low average: higher prevalence of part-time work, more students combining study with work, relatively lower hours for men (linked to more equal sharing of home responsibilities).
- Because of high employment rate, total hours worked per capita compare favorably to peers.
- Labor supply elasticities to effective income are positive; tax and benefit policy can affect labor supply on intensive and extensive margins.
- Government’s recent income tax proposal (reduction of marginal tax rates except for very high-income earners; increase in earned income credit) is estimated to increase labor supply by 0.18 percent.
  - This is slightly lower than the expected impact of the holiday cancellation.
  - The tax proposal comes with some deterioration of the Gini index and some fiscal cost.
- IMF (2019) illustrative reform: reforming marginal effective tax rates in a revenue-neutral way while maintaining guaranteed minimum income could lead to a 0.5 percent increase in labor supply, with Gini index deterioration from 0.203 to 0.216.
  - Analysis used household survey data, OECD 2019 Tax-Benefit model, hours elasticity at 0.10, average participation elasticity at 0.20.

Disincentivizing Early Retirement
- Denmark’s one-to-one indexation of retirement age to life expectancy implies rising statutory retirement age; for cohorts entering labor market in 2020, statutory retirement age will be highest among peers.
- Actual-to-statutory retirement age difference in Denmark is smaller than most European peers; ratio of people who retire early to the total declined in recent years to around 50 percent.
- Illustration: increasing effective employment by ¼ percent (estimated effect of holiday cancellation) would require reducing ratio of people using retirement schemes from 50 percent to 48 percent.

Increasing Employment of Immigrants
- Employment rates of immigrants and descendants (especially non-western) have improved but gaps remain (6–20 percentage points depending on origin).
- If all immigrants and descendants were employed at the same rate as people of Danish origin, total employment would increase by 2.7 percent.
- To increase effective employment by ¼ percent (holiday effect), employment rate of each immigrant/descendant group would need to rise by 1.15 percentage points.
  - Recent data: employment rate of immigrants and descendants increased by 4 percentage points between 2019 and 2021 (largely cyclical but some gains may persist).
- To fully utilize immigrant labor potential, closing education gaps and reducing school segregation (isolation index) are important; PISA 2018 shows Denmark ranked relatively poorly on educational attainment gaps by origin and ancestry.
- Government efforts to support on-the-job training for new entrants with immigrant backgrounds would help.

### D. Main Takeaways and Future Work
- Cancellation of Store Bededag provides a rare policy experiment estimated to raise actual work hours by 0.14–0.34 percent (central estimate around 0.25 percent).
- Comparable labor supply gains could be achieved through:
  - tax/benefit reforms (e.g., 0.18 percent from recent income tax proposal; 0.5 percent from an illustrative revenue-neutral tax reform);
  - modest reductions in early retirement participation (e.g., reducing retirement-scheme usage from 50 percent to 48 percent); or
  - modest increases in immigrant employment rates (e.g., a 1.15 percentage point rise in employment rates across immigrant groups to achieve 0.25 percent total employment gain).
- Demand-side losses from foregone domestic tourism are likely small (0.01–0.06 percent of GDP).
- Long-term labor supply effects are ambiguous due to opposing forces: households clawing back leisure vs. norm effects solidifying.
- Policy considerations: equity considerations, fiscal costs, impact on productivity, and ease of implementation, including political economy considerations.
- Future work: monitor actual labor supply responses to the permanent change and assess persistence of norm effects versus leisure claw-back.

*Prepared by Gohar Minasyan with support from Fuda Jiang (all EUR). Source: Selected Issues Paper excerpt (sipea2023053).*

### References _____________________________________________________________________________ 10

### CANCELLATION OF A PUBLIC HOLIDAY IN DENMARK

### A. Introduction
- Denmark faces demographic headwinds that challenge maintaining high rates of growth; increasing labor supply is a policy goal.
- Potential policies to increase labor supply: higher labor force participation and lower structural unemployment (extensive margin); increasing the retirement age and tilting labor-leisure balance including annual holidays and personal leave days (intensive margin).
- Denmark decided to cancel Store Bededag (Great Prayer Day). Decision approved by parliament in February 2023 and effective in 2024.
- Store Bededag is celebrated on the third Friday after Easter (always on a weekday); its cancellation implies an increase in annual statutory working hours by 0.45 percent.
- Tripartite agreement: employees with monthly salary contracts receive a 0.45 percent increase in annual salary; hourly contract workers (about 20 percent of employment) will be compensated according to hours worked on the new working day.

### B. Estimating the Expected Impact on Labor Supply
- Two complementary approaches used to estimate impact:
  - Historical correlation between agreed and actual work hours in Denmark (the “norm effect”).
  - Cross-country empirical literature on causal effect of public holidays on economic growth.

Using a “Norm effect” Estimate
- “Norm effects” can influence whether workers actually increase hours following a statutory increase; social coordination and transaction costs matter.
- Ministry of Finance estimate: correlation between statutory and actual annual working hours in Denmark has been around 0.75 since the 1980s.
- Based on a 0.75 correlation, a 0.45 percent increase in statutory work hours predicts a 0.34 percent increase in actual work hours.
- Caveat: historical norm estimates are based on a long-term trend toward more leisure; expecting symmetric application when reversing the trend may be optimistic.

Using Results from Empirical Literature on Causal Impact of Public Holidays on Growth
- Rosso and Wagner (2022) estimate a statistically significant working-day elasticity of GDP of around 0.2 using exogenous calendar variation.
- Mapping that to labor supply with Denmark’s labor share of 2/3 implies an elasticity of labor supply of 0.3, giving a 0.45 percent statutory increase → 0.14 percent increase in actual work hours.
  - Calculation in source: 0.2*2/3=0.3; 0.3*0.45=0.135 percent (reported as 0.14 percent).
- Two factors affecting applicability:
  - Calendar variation does not alter wages, whereas cancellation of Store Bededag includes wage compensation for the extra workday (likely increasing demand-side multiplier via higher propensity to consume from labor income).
  - Calendar variation is transitory; cancellation is permanent and may prompt households to claw back leisure over time.
- Near-term expectation: wage-compensation effect likely dominates, so labor supply impact may be larger than 0.14 percent.

Demand-side Effects
- Domestic tourism spending is used as a proxy for consumption related to a public holiday.
- Share of domestic tourism spending in Denmark was 3.4 percent in 2019.
- Foregone domestic tourism spending from the holiday could imply an impact between 0.01 and 0.06 percent of GDP (simple calculation: 3.36/52 =0.06 upper bound; 3.36/365=0.01 lower bound).

Summary Estimate
- Cancellation of Store Bededag expected to increase labor supply by around ¼ percent (0.14–0.34 percent).
  - Upper bound: 0.34 percent (historical correlation approach).
  - Lower bound: 0.14 percent (cross-country empirical literature).
- Ambiguity about long-term vs short-term impact: households may claw back leisure over time, but norm effects could solidify, making long-term effect ambiguous.

### C. In Comparison: Other Channels to Increase Labor Supply
- Purpose: compare alternative channels that could yield similar magnitude increases in labor supply (illustrative calibrations, not policy prescriptions).

Incentivizing Longer Hours Worked
- Average hours worked per employed in Denmark around 34 hours per week.
- Reasons for relatively low average: higher prevalence of part-time work, more students combining study with work, relatively lower hours for men (linked to more equal sharing of home responsibilities).
- Because of high employment rate, total hours worked per capita compare favorably to peers.
- Labor supply elasticities to effective income are positive; tax and benefit policy can affect labor supply on intensive and extensive margins.
- Government’s recent income tax proposal (reduction of marginal tax rates except for very high-income earners; increase in earned income credit) is estimated to increase labor supply by 0.18 percent.
  - This is slightly lower than the expected impact of the holiday cancellation.
  - The tax proposal comes with some deterioration of the Gini index and some fiscal cost.
- IMF (2019) illustrative reform: reforming marginal effective tax rates in a revenue-neutral way while maintaining guaranteed minimum income could lead to a 0.5 percent increase in labor supply, with Gini index deterioration from 0.203 to 0.216.
  - Analysis used household survey data, OECD 2019 Tax-Benefit model, hours elasticity at 0.10, average participation elasticity at 0.20.

Disincentivizing Early Retirement
- Denmark’s one-to-one indexation of retirement age to life expectancy implies rising statutory retirement age; for cohorts entering labor market in 2020, statutory retirement age will be highest among peers.
- Actual-to-statutory retirement age difference in Denmark is smaller than most European peers; ratio of people who retire early to the total declined in recent years to around 50 percent.
- Illustration: increasing effective employment by ¼ percent (estimated effect of holiday cancellation) would require reducing ratio of people using retirement schemes from 50 percent to 48 percent.

Increasing Employment of Immigrants
- Employment rates of immigrants and descendants (especially non-western) have improved but gaps remain (6–20 percentage points depending on origin).
- If all immigrants and descendants were employed at the same rate as people of Danish origin, total employment would increase by 2.7 percent.
- To increase effective employment by ¼ percent (holiday effect), employment rate of each immigrant/descendant group would need to rise by 1.15 percentage points.
  - Recent data: employment rate of immigrants and descendants increased by 4 percentage points between 2019 and 2021 (largely cyclical but some gains may persist).
- To fully utilize immigrant labor potential, closing education gaps and reducing school segregation (isolation index) are important; PISA 2018 shows Denmark ranked relatively poorly on educational attainment gaps by origin and ancestry.
- Government efforts to support on-the-job training for new entrants with immigrant backgrounds would help.

### D. Main Takeaways and Future Work
- Cancellation of Store Bededag provides a rare policy experiment estimated to raise actual work hours by 0.14–0.34 percent (central estimate around 0.25 percent).
- Comparable labor supply gains could be achieved through tax/benefit reforms (e.g., 0.18 percent from recent income tax proposal; 0.5 percent from an illustrative revenue-neutral tax reform), through modest reductions in early retirement participation (e.g., reducing retirement-scheme usage from 50 percent to 48 percent), or by modest increases in immigrant employment rates (e.g., a 1.15 percentage point rise in employment rates across immigrant groups to achieve 0.25 percent total employment gain).
- Demand-side losses from foregone domestic tourism are likely small (0.01–0.06 percent of GDP).
- Long-term labor supply effects are ambiguous due to opposing forces: households clawing back leisure vs. norm effects solidifying.

*Prepared by Gohar Minasyan with support from Fuda Jiang (all EUR).*

### 17.      The cancellation of the public holiday is expected to have a small positive impact on

### 17.      The cancellation of the public holiday is expected to have a small positive impact on 

### Estimated labor supply effect
- The policy is characterized as "a rare policy initiative, making it difficult to estimate its expected economic implications."
- Based on "recent cross-country empirical analysis on the causal effects of public holidays on economic growth" and "the historical correlation between statutory and actual work hours in Denmark," labor supply can be expected to increase by about 0.14–0.34 percent.
- A similar labor supply impact "should also be possible to achieve through a revenue–neutral tax and benefit system reform."

### Magnitude comparison
- The estimated labor supply increase "is comparable to":
  - reducing the ratio of people using early retirement schemes by 2 percentage points; or
  - increasing the employment rates of different categories of immigrants and descendants by 1.15 percentage points each.

### Alternative measures and policy tradeoffs
- "Efforts to explore alternative measures to increase labor supply should continue."
- Context: "Thanks to its successful flexicurity model, Denmark has been able to achieve a well-functioning labor market characterized by high labor market participation and low structural unemployment."
- Implication: "further efforts to sustainably increase employment may involve some policy tradeoffs that need to be carefully considered."
- Specific policy options mentioned:
  - reforming the tax and benefit system;
  - tightening conditions for early retirement;
  - efforts to close the employment gaps of immigrants.
- Considerations to weigh for these options: "equity considerations, fiscal costs, impact on productivity, and ease of implementation, including political economy considerations."

*Source: Selected Issues Paper excerpt (sipea2023053).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023053.pdf_