It's a good way to minimise wage costs if you don't mind having a surly, resentful staff, if they're supervised tightly enough for you to be confident they won't be able to find ways to get back at you, if they're mainly unskilled and if unemployment is high. But if their work is skilled, if you need them to accept a high degree of responsibility with limited supervision, if there are shortages of skilled labour and rival employers are on the poach, it's a great way to damage a good business. I'm sure there are second-rate business people urging the Libs to restore their former ability to screw their workers with impunity, but I hardly think it's the way to a brighter, more productive future. The first stage of employer enlightenment comes when they seek to improve employees' performance with monetary incentives: merit increases to selected workers, bonuses or other forms of performance pay. This approach makes sense to model-bound economists and money-minded executives, but industrial psychologists know it often backfires. Workers do care about pay, but they care less about the absolute level of their pay than about its relative level - that is, what they're getting compared with others are getting, particularly those they consider their equals. In other words, play favourites with pay and you're just as likely to create dissatisfaction as satisfaction.

The other thing to remember (which many economists and business people don't) is that when you establish a culture that good performance is rewarded with money, you tend to demotivate people from performing well for other, more intrinsic reasons. You debase the currency, so to speak. What never occurs to second-rate managers - the sort of managers who run to politicians for legal solutions to their inadequate relationships with their workers; the sort who never reach the ultimate stage of human-relations enlightenment - is that most workers want to work in an environment in which they can trust their bosses and be trusted by them, where they can give and receive loyalty. Why wouldn't you want to work in such an environment? Recent research by two Canadian economists, John Helliwell, of the University of British Columbia, and Haifang Huang, of the University of Alberta, shows that life satisfaction - happiness - is significantly higher among workers who work where they rank management trustworthiness highly. For example, the roughly one quarter of surveyed workers who rated trust in management at nine or 10 on a 10-point scale also rated their satisfaction with life at 8.3 on a 10-point scale, compared with an average of 7.5 for the quarter or more who rated trust in management at five or below. And, get this: for the whole sample of workers, a change in trust in management of just 0.7 points had the same effect on life satisfaction as a 31 per cent change in income. But why should a hard-headed manager care about the happiness of the people working for them?

Well, one reason is that, unless managers are money-hungry to a quite inhuman extent, they themselves would get more satisfaction being the boss of an outfit where everyone gets on and pulls together. Even a manager should see there is more to life than money (and, please, spare me the sermon about how corporation law requires you to maximise profits for the shareholders). But, if that's not a good enough argument for you, try this: longitudinal research finds that happier people tend to be more successful in all dimensions of their lives - their incomes, their careers, their health and their relationships. It's not hard to believe successful people are happier, but this is saying the reverse: being of a happier disposition tends to make people more successful. More specifically, happy workers make more money, receive more promotions and better supervisor ratings, and are better citizens at work. So, if employers want to offer a satisfaction-inducing working environment, what must they do? The British psychologist Peter Warr has identified five factors as important to job satisfaction. First, opportunities for personal control. This means having some discretion - autonomy - in how to tackle problems, apply skills and envisage outcomes. Second, jobs with a variety of tasks. Many jobs are naturally varied but highly repetitive jobs are soul-destroying. When workers work in teams, roles can be shared.

Third, good supervisors provide a balance of freedom and supervision. The ideal ratio of positive to negative feedback is about six to one. Fourth, jobs that afford people respect and status are likely to engender feelings of competence and pride. In the best organisations, the respect that is inherent in some high-status jobs can be extended to all jobs. Finally, have clear requirements and information on how to meet the requirements. Ross Gittins is the economics editor.