Macroeconomic volatility undermines general well-being
Research shows that the distress most people experience from a recession is twice as high as the satisfaction they derive from an economic boom phase. Compared with a stable economy, a volatile economy not only has higher peaks, but also deeper troughs, which can have dire consequences for the labour market, as it leads to unemployment and dismissals. As many people derive their identity from their jobs, becoming unemployed makes them unhappier. Another study shows that the impact of dismissal on a person's happiness is more lasting and more profound than many other events in life, such as divorce or the death of a loved one. This is why it is desirable to reduce volatility, in other words the boom and bust cycle in the economy.
Volatility comparison against appropriate reference group
Compared with the rest of the euro area, volatility in the Dutch economy in terms of GDP growth would not appear to show a very prominent boom and bust cycle. Measured by the standard deviation (a measure of volatility), the Dutch economy is found to be slightly more volatile, but the difference is not remarkable: 2.0 percentage points for the Netherlands, against 1.7 percentage points for the rest of the euro area. Such a comparison, however, provides a distorted picture, because it sets the Netherlands against countries that do not resemble it in terms of economic structure (openness, industry sector distribution and wealth level), such as those in southern Europe. A more appropriate exercise, therefore, is to compare volatility in the Dutch economy against that in economies of countries which are similar in these respects, also known as peers. Based on similarities in terms of economic structure, Belgium, Austria and Denmark can be considered such peers. Figure 1 shows that the Dutch economy tends to have higher peaks and deeper troughs than these countries. This finding does not change if Germany and France, which do not have small, open economies, but are important trading partners and have similar institutions, are added to the peer group.