Expanded social security improves worker productivity and motivation, expanding economic output of businesses.

Based on the census data of registered manufacturing enterprises with more than 20 employees, this paper reflects our analysis on how the enterprise-level provision of social security influenced enterprise performance in Indonesia from 2010 to 2014. This is an interesting period to examine, given that the social security system in Indonesia has undergone a number of changes in recent years. Currently, the different components of social protection provision are work injury, death benefit, old-age savings, health insurance and a pension scheme, as regulated under Law No. 24 (2011). However, micro and some small enterprises (fewer than 20 workers) are exempt from the pension scheme, and micro enterprises and other workers (including construction workers, self employed and informal workers) can only register for the work injury and death benefit schemes. Law No. 24 created the basis for the establishment of two social security providers in Indonesia, one for health and targeting all citizens and the other one for employment and targeting all workers. For this paper, we defined social security provision as the per-worker amount the enterprise spent on pension contributions, social allowance and insurance, while the outcomes variable is the per worker revenue and profit. Using standard regression techniques, we found that enterprises that increased their social security spending by 10 per cent experienced a per-worker revenue gain of up to 2 per cent. When unobserved heterogeneity was accounted for in the balanced panel of enterprises, the magnitude dropped but remained positively significant, indicating that higher ability owners are more likely to pay social insurance for the workers, which is not surprising. The return was particularly high for smaller enterprises and for local government-owned enterprises. However, statistically the results were more robust for private domestic and foreign owned enterprises because they constitute the majority of the sample. There was also some variation in the social security-revenue relationship across different sectors. In general, though, the various divisions supported the main results. Finally, there was no evidence that enterprises that contributed to the social security system experienced lower profits per worker, which suggests that increasing worker benefits may be a worthwhile enterprise investment. With regard to what is driving the positive performance results, one plausible explanation is that social security provisions lead to enhanced workforce effort, either by enterprises being able to attract more motivated employees and/or by raising the motivation of their existing workers. This is in accordance with the theories of human resource management bundles, dynamic capabilities and social equity or exchange theory. Another explanation could be that more socially aware enterprises benefit from cooperation with larger, globally connected companies that are committed to corporate social responsibility and/or require compliance with labour regulations. Overall, social security provision seems to be beneficial to workers as well as enterprises. The question then remains how to incentivize enterprises to make social security contributions. Given that social security contributions are often paid in conjunction with taxes, which generally are higher than social security payments, one option would be to offer tax breaks or subsidies, especially to newly operating and smaller enterprises that are generally more resource constrained and short-sighted in their business approach. This might enable employers to utilize more resources towards investing in their workforce.