Knowledge@Wharton: “Happy workers make good workers, all to the benefit of the firm and its shareholders. That, at least, is the view on the progressive side of the management-theory spectrum. Others, of course, believe that employees work hardest under the crack of the whip and fear of unemployment. In the early 20th Century, some economists argued that high levels of employee satisfaction meant workers were overpaid or underworked. But what does the data say? New research by Wharton finance professor Alex Edmans and two colleagues shows that higher levels of job satisfaction among employees can indeed produce higher returns for a firm’s shareholders. But there’s an important caveat: The effect is much more pronounced in countries that have flexible labor policies, where hiring and firing is easier, than in heavily regulated economies. “The countries with higher [stock] returns were the ones with more flexible labor markets,” Edmans says. The findings are detailed in the paper “Employee Satisfaction, Labor Market Flexibility, and Stock Returns around the World,” co-authored by Lucius Li and Chendi Zhang, both of the University of Warwick. It builds upon previous sole-authored studies by Edmans which found that companies ranked among the 100 best to work for in the United States produced annual stock returns two to three percentage points higher than peers that were not on the list. But that was in the U.S.”