SME Productivity as a Strategy for Inclusive Growth: Addressing Jobs, Poverty, and Inequality

Small and Medium-sized Enterprises (SMEs) are crucial for an inclusive economy. However, their contribution is commonly quantified by profitability instead of their productivity. Few studies have examined the extent to which SME productivity contributes to unemployment, income disparity, and poverty reduction, especially at the regional level. This study examines the extent to which changes in SME total factor productivity (TFP), efficiency (EFC), and technology (TEC) determine these three major economic problems in Aceh province, Indonesia. The study utilises 2,070 pooled observations of six economic sectors’ SMEs across 23 districts and cities over the 2010-2024 period. TFP is calculated using the Malmquist Index, and its impacts are measured using SUR weighting-EGLS panel regression. The study documented a productivity-inclusion paradox in which TFP and TEC were associated with higher unemployment and poverty in several model specifications. This implies that technical change provides benefits to skilled workers and could substitute for some jobs. EFC was associated with lower poverty and income inequality, while its relationship with unemployment was statistically insignificant. TEC was also associated with higher income inequality, whereas TFP showed no significant association with inequality. These empirical results show that TFP growth does not necessarily lead to more inclusive economic outcomes. This study enriches the existing literature by providing combined evidence on SME TFP and its contribution toward unemployment, poverty, and inequality reduction. The policy recommendations advocate technological upgrades with retraining, professional and digital training, inclusive funding, and stronger societal protection. This is in harmony with SDG 1 (poverty reduction), SDG 8 (decent work and economic growth), and SDG 10 (reducing inequality) to promote an inclusive economy.