Why happy workers pay off for firms

Recent research suggests businesses may have a strong financial incentive to improve job satisfaction among their employees.


Citizens’ wellbeing is rising to the top of the political agenda in many countries. The British government, for example, recently announced a What Works Centre for Wellbeing, with initial funding of £3.5 million over three years to investigate the determinants of wellbeing and how to improve it. This follows government investments in wellbeing metrics developed and pioneered by Britain’s Office for National Statistics. Some argue that these metrics should be the basis for national accounts that provide an indication of how well the nation is doing, comparable to GDP estimates.

The idea that wellbeing should be a target for public policy has been promoted for some time by prominent economists, including Lord Layard and the Nobel laureates commissioned by the Sarkozy government in France. Others are more sceptical and wonder, even if it’s a good idea to try to measure wellbeing, is it really appropriate or sensible for government to try to intervene to improve wellbeing?

Psychologists, economists, and others know a great deal about the determinants of individuals’ wellbeing, and one key element is what they do in their working life. One recent study found that work was among the worst activities for people’s momentary happiness -- just above being sick in bed. But other studies indicate much depends on what type of job you do and how that job is designed by the employer.

New evidence on employees’ wellbeing

A review we recently conducted for Britain’s Department for Business Innovation and Skills shows that employers can improve employees’ wellbeing through improvements in job quality. Employees’ wellbeing will rise where they have control over the pace and content of work tasks; where demands placed on the worker are not excessive; where there is variety in their work; where there are opportunities for development; where supervisors are supportive; where pay and treatment is perceived as fair; and where the work environment is pleasant and safe.

Is improving employee wellbeing profitable?

But the key issue is not whether employers can improve employee wellbeing. Rather, it is whether it is in their economic interests to do so.

After all, if, as is commonly assumed in economics, firms are profit-maximisers, they will take account of the costs associated with any improvement in employee wellbeing. Improving employee wellbeing may be a laudable goal for society as an end in itself. It may have positive externalities too, including reductions in expenditure on health services.

But employers are only likely to invest in employee wellbeing where there is a clear business case for doing so. That business case rests on the returns to the firm.

The theory linking improvements in employee wellbeing to improvements in firms’ bottom line is ambiguous. Much depends on the firm’s production process, the types of workers it recruits, their ability to add value to the production process, and the extent to which their productivity is affected by their wellbeing.

For example, a firm’s output may be highly dependent on talented senior executives whose performance can affect the strategic direction of the firm and the productivity of workers lower down the chain of command. It may therefore make sense to invest in their wellbeing if this can be converted into motivation and effort. It is less clear whether firms will want to invest in the wellbeing of employees who perform mundane routine tasks, perhaps add little value to the firm, and are easily replaced by those recruited from the ranks of the unemployed.

Even if a firm is willing to invest in employees’ wellbeing, there is no certainty that higher subjective wellbeing will translate into greater profitability at the level of the workplace or organisation.

First, one must factor in the costs an employer may have incurred to bring about the improvement in wellbeing. Second, many institutional and contextual factors may intervene, such that any improvements in performance dissipate. Third, group dynamics come into play when considering relationships at a workplace or organisation level that are not considered when focusing on individual effects.

The link between wellbeing and performance

There is empirical evidence linking employees’ wellbeing to their individual performance. For example, greater subjective wellbeing feeds through to individuals’ performance in the labour market. There is also recent evidence of a causal link between increased wellbeing and improved worker productivity, at least in a laboratory experiment setting. But the empirical evidence at the organisation level is extremely sparse.

Perhaps the most compelling evidence of a link comes from a survey of manufacturing in Finland, which found that mean workplace job satisfaction was independently associated with subsequent value-added per employee. A one point increase (on a six-point scale) in the average level of job satisfaction among workers at the plant increased the level of value-added per hour worked two years later by 3.6 percentage points, after controlling for other factors. This estimate rose to 9 percentage points in a two-stage estimation approach designed to account for unobserved establishment-level heterogeneity.

Our BIS report is the first study for Britain of the link between employee wellbeing and firm performance. Analysing the nationally representative 2011 Workplace Employment Relations Survey, we find that those workplaces with rising employee job satisfaction also experience improvements in workplace performance, while deteriorating employee job satisfaction is detrimental to workplace performance.

Employee job satisfaction is positively associated with workplace financial performance, labour productivity, the quality of output and service, and an additive scale combining all three aspects of performance. Workplaces experiencing an improvement in non-pecuniary job satisfaction -- whether measured in terms of the average level of satisfaction in the workforce, or measured in terms of an increase in the proportion ‘very satisfied’ or a reduction in the proportion ‘very dissatisfied’ -- also experience an improvement in performance.

These findings are consistent with the proposition that employers who are able to raise employees’ job satisfaction may see improvements in workplace profitability (financial performance), labour productivity, and the quality of output or service.

Although we cannot state definitively that the link between increasing job satisfaction and improved workplace performance is causal, the findings are robust to tests for reverse causation and persist within workplaces over time, so that we can discount the possibility that the results are driven by fixed unobservable differences between workplaces. There is therefore a prima facie case for employers to consider investing in the wellbeing of their employees on the basis of the likely performance benefits.

The link we find is between job satisfaction and workplace performance. It is not apparent for other aspects of employee subjective wellbeing such as job-related affect (measured in terms of the amount of time feeling tense, depressed, worried, gloomy, uneasy, and miserable). The analysis thus suggests that there is no clear case for employers investing in these other aspects of employee wellbeing – although equally we find no clear disadvantage to doing so.

Concluding remarks

These are encouraging findings, but the scope of the analyses has not allowed us to explore the processes that could have been instrumental in forging the link between employee wellbeing and workplace performance. Further work is required to develop insights into how employers can facilitate the positive outcomes revealed in this study.

This article was originally published in VoxEU. Reproduced with permission. 

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