The Economics of Christmas

By Julia Porter | December 1, 2022

The holiday season is a time for many celebrations such as Christmas, Hanukkah, and Kwanzaa to name a few. It is commonly thought of as a time for giving and spreading joy, however, a closer look into the economic impact of the holiday season reveals shocking truths about consumer spending for example, Americans spend nearly $6.1 billion on Christmas trees alone and an average of $997.73 per person on Christmas gifts. Winter is typically a high-volume selling season for goods suppliers around the world. Sales increase significantly as people purchase gifts, decorations, and supplies to celebrate. In the U.S., the "Christmas shopping season" starts as early as October.

Stepping back to look at the bigger picture, researchers suggest that Christmas may incur an overall net loss. This idea was first theorized by economist Joel Waldfogel, who published his research on the deadweight loss associated with the holiday season. We can draw this conclusion based on economic theory, which suggests prices rise during the season due to an increase in demand by consumers. If increased demand is not coupled with an increase in supply, we can expect prices to rise. Despite this reasoning, the empirical evidence does not support this claim. A study done by Warner and Barsky (1995) found interesting results, such as a decrease in prices for consumer goods like action figures, power tools, and food processors. Similarly, research conducted by Chevalier et al. (2003) and MacDonald (2000) revealed reduced prices for groceries during the Christmas season. Although there is no evidence that this trend is present with groceries today, these findings could be explained as an incentive for consumers to buy more during the holiday season.

In 2021, The National Retail Federation forecast for total holiday sales was 843.4–859 billion dollars. Due to the massive amount of consumer spending, we can predict the effects on the economy. Individuals could reasonably assume that the economy would benefit as a result of increased consumption, but we are met with mixed results. While microeconomic research suggests that Christmas could incur a welfare loss, from a macroeconomic point of view, it may have an overall benefit because the holiday season leads to more people being employed. Various macroeconomists have tested for an overall “Santa Claus Effect'' in business cycles, which describes a boom in the fourth quarter following the slow first quarter. Even more important to discuss than the “Santa Claus Effect'' is whether such a significant increase in output and employment in the fourth quarter followed by a major contraction the following first quarter is economically efficient. Although there are some detrimental effects, such as unemployment, associated with a boom in the fourth quarter followed by a slow first quarter, this trend in the economy is deeply ingrained due to the tradition of gift-giving associated with the holiday season and is unlikely to be changing anytime soon.

It is clear that the Christmas season incurs various impacts on the economy, with an overall increase in consumer spending and a higher demand for retail employers to hire, there is reason to believe that the Christmas season has positive effects on the economy as a whole.

Edited by Rachel Kunka