Modeling the Human-Capital Tradeoffs: Workforce Dynamics and Labor Cost Scenarios Impact on Firm Performance

This study examines how labor cost decisions shape firm profitability through the human dynamics unfolding within organizations in an emerging market context. Using a multidisciplinary approach to complement and move beyond static econometric approaches, it developed a system dynamics model calibrated with panel data from 62 Indonesian publicly listed firms (2020–2024). The model incorporated feedback loops linking labor costs, workforce behavior, productivity, and financial performance, and was used for forward-looking 10-year scenario analysis. Validated through structural, behavioral, and sensitivity tests, the simulation reproduces historical trends with high accuracy, achieving Mean Absolute Percentage Error (MAPE) values below 1% across key variables. Analysis of three labor-cost scenarios (decrease, maintain, and increase) revealed delayed and nonlinear effects driven by workforce responses. Short-term cost suppression may improve immediate financial outcomes but often undermines workforce stability and long-term profitability through reinforcing feedback effects. Conversely, strategic investment in employees enhances sustainable performance, though outcomes depend on behavioral adaptation and organizational conditions. Overall, the findings highlight a critical managerial trade-off between business cost efficiency and human investment, demonstrating that labor costs serve not merely as accounting inputs but as dynamic strategic levers that shape long-term and sustainable firm performance.