Determinants of the profitability of Sheltered Workshops: efficiency and effects of the COVID-19 crisis

People with disabilities face markedly higher unemployment and risks of poverty and social exclusion in the EU and especially in Spain. Sheltered Workshops (SWs), known as Special Employment Centers in Spain, provide employment and support to individuals with disabilities, aiming to integrate them into the mainstream labor market while delivering personal and social services. SWs are part of the Social Economy and function as Work Integration Social Enterprises. Given their reliance on public support and dual mission, they must demonstrate efficiency, profitability, and viability, particularly during crises like the sovereign debt crisis and COVID-19, which strained public budgets. Grounded in resource-based theory, this study posits that internal resources and capabilities, including both financial and non-financial, tangible and intangible assets, drive SW profitability more than sectoral factors. The literature on profitability determinants in social enterprises, and specifically SWs, is scarce and often excludes disruptive periods such as COVID-19. Prior work suggests links between size, age, growth, financial risk, and profitability, and highlights potential tensions between social and economic aims. No prior study has measured operational and social efficiency using DEA to examine links with profitability for SWs, nor assessed the moderating roles of legal form (for-profit vs non-profit) and COVID-19. This study analyzes 1133 Spanish SWs from 2010–2020 using DEA, static panel (random effects), and dynamic panel (system GMM) to investigate how efficiency relates to profitability, including during crises, and whether effects differ by legal status. It contributes by clarifying SW nature and impact, comparing FP and NP orientations, jointly measuring financial and social efficiency, identifying profitability determinants, and testing moderating effects of legal form and COVID-19. Findings preview that operational efficiency positively and strongly relates to profitability, social efficiency negatively relates, with an overall net positive effect, and that SWs remained relatively resilient during crises. The study offers guidance for public policy and managerial practice.

Theoretical background reviews the dual mission of SWs, their advantages for integrating people with disabilities, and criticisms such as potential segregation and lower job quality compared to ordinary employment. A key controversy concerns legal form: non-profit (NP) SWs reinvest surpluses to advance social goals and tend to hire workers with greater disabilities, while for-profit (FP) SWs emphasize profit distribution alongside incentives and subsidies for hiring disabled workers. Spanish Law 5/2011 frames SWs within the Social Economy, though some argue only NP SWs align fully with its principles. Hybrid organizations face tensions between economic and social missions; overemphasis on one can cause mission drift or blockage. Funding constraints drive the need for diversified income to reduce dependence on subsidies. Crises in 2008–2014 and COVID-19 negatively impacted firms broadly, but the Social Economy often shows resilience with relatively smaller employment declines, though COVID-19 curtailed growth trends and particularly affected sectors where many SWs operate. The literature on profitability determinants in social enterprises is limited. Identified factors include solvency, liquidity, financial risk, leverage, sales growth, productivity, size, age, sector, location, subsidies, and crises. Management inefficiency is frequently linked to failure; thus, efficiency is a plausible determinant of profitability. Few studies address SWs specifically, and none have used DEA to measure both operational and social efficiency and connect them to profitability while considering legal form and COVID-19. Hypotheses: H1, operational efficiency positively relates to profitability; H2, social efficiency negatively relates to profitability; H3, the efficiency-profitability association is more accentuated for FP SWs; H4, the positive efficiency-profitability relationship is stronger during the COVID-19 period.

Sample and data: Using the Spanish Public Employment Service (SEPE) register, the study considers all Spanish SWs from 2010–2020. Financial variables come from the SABI database. Firms with missing or insufficient observations were excluded, yielding an unbalanced panel of 1133 SWs and 8546 firm-year observations (FP: 6476; NP: 2070). Analytical approach: Profitability is measured by return on assets (ROA = net income/average assets). Efficiency is estimated via data envelopment analysis (DEA) under constant (CRS) and variable returns to scale (VRS), output oriented. Inputs: fixed assets, total liabilities, total equity, operating costs. Outputs: operating revenue and other operating revenue (including operating subsidies). Social efficiency is proxied by quantifiable indicators of social mission fulfillment related to employment of disadvantaged workers; models satisfy isotonicity and rely on input-output combinations with Spearman rank correlations below 0.9. Empirical specifications: Static random-effects GLS panel models relate ROA to DEA efficiency (overall VRSO, financial VRSF, social VRSS), financial risk (Altman Z-score), size (log total assets), age (log years since founding), liquidity (current ratio), tangibility (fixed assets/total assets), leverage structure (long-term debt/total debt), sector (services vs manufacturing), location (regions with highest disability employment rate), legal status (FP dummy), COVID-19 dummy (2020), and year dummies. Interaction terms test moderation by legal form (Effic × FP) and COVID-19 (Effic × COVID_19). To address potential endogeneity, reverse causality, and persistence, a dynamic panel using system GMM (Arellano-Bover; Blundell-Bond) is also estimated with Windmeijer-corrected standard errors, instrument validity (Sargan), and serial correlation tests (AR(1), AR(2)). Robustness checks include alternative profitability measures (operating profit margin, gross profit margin) and efficiency measured under CRS, confirming consistency of results. Multicollinearity checks (correlations, VIF) indicate no concerns.

• Efficiency-profitability nexus: Operational/financial efficiency (VRSF) is positively and significantly associated with profitability (ROA); social efficiency (VRSS) is negatively and significantly related to ROA. The positive effect of operational efficiency dominates the negative social efficiency effect, yielding an overall positive association for total efficiency (VRSO). SWs that manage operations efficiently better balance social and economic goals while achieving financial viability. - Moderation by legal status: Interaction terms between efficiency and FP legal status are not statistically significant; thus, the efficiency-profitability relationship does not significantly differ between FP and NP SWs, and the FP vs NP dummy is not a direct determinant of profitability. - COVID-19 effects: Profitability declined during COVID-19 and during the earlier financial crisis. However, the interaction Effic × COVID_19 is positive and significant for overall and financial efficiency, indicating that efficient SWs were more resilient and maintained higher profitability during the pandemic, supporting H4. - Control variables: Lower financial distress risk (higher Altman Z-score), larger size, and greater long-term debt share are positively associated with ROA; typical estimated effects reported include approximately +0.74 percentage points in ROA per 0.01 increase in Z-score, +4.43 for long-term debt share, and +2.24 for size. Liquidity (current ratio), tangibility (fixed asset intensity), and age show negative and significant associations with ROA (illustratively around −0.29, −7.77, and −2.33, respectively). Sector (services vs manufacturing) and location dummies are generally not significant. - Descriptive insights: Average ROA ~4.19% and ROE ~13.60%, lower for NPs; substantial reliance on other operating revenue (subsidies), especially in NPs (other operating revenue/net sales ~40.34% vs overall ~31.94%). Average VRS overall efficiency is high (~81.4%); FPs exhibit slightly higher financial and overall efficiency but lower social efficiency than NPs. Staff expenses relative to sales are higher in NPs, reflecting prioritization of social goals. Short-term indebtedness rose in 2020 amid favorable financing conditions, while liquidity remained high. - Robustness: System GMM confirms positive, significant effects of overall and financial efficiency on ROA, with social efficiency negative but often not significant. Results persist with alternative efficiency (CRS) and performance (OPM, GPM) measures; diagnostic tests support instrument validity and absence of problematic serial correlation.

The findings substantiate resource-based theory for SWs by showing that internal capabilities, particularly operational efficiency, are key drivers of financial performance. Although social efficiency can depress short-term profitability, the dominant positive effect of operational efficiency yields a net positive overall efficiency-profitability relation, indicating that SWs can serve their social mission while maintaining financial viability. The absence of significant moderating or direct effects of legal status suggests that, despite differing orientations, FP and NP SWs can achieve similar efficiency-profitability dynamics when managed effectively. During crises, especially COVID-19, efficiency becomes even more critical: efficient SWs demonstrate greater resilience, cushioning profitability declines. These results highlight the strategic importance of professionalized management, revenue diversification, and prudent financial structures (lower risk, appropriate long-term financing), enabling SWs to balance dual objectives and withstand external shocks.

This study analyzes 1133 Spanish SWs from 2010–2020 to identify profitability determinants and the role of efficiency using DEA, random-effects GLS, and system GMM. Main contributions include: (1) conceptual clarification of SWs as hybrid enterprises with dual missions; (2) joint assessment of financial and social efficiency; (3) evidence that operational efficiency strongly and positively relates to profitability, while social efficiency exerts a smaller negative effect, producing a net positive overall efficiency effect; (4) demonstration of crisis impacts on profitability with efficiency-based resilience during COVID-19; and (5) finding that legal status does not significantly moderate the efficiency-profitability linkage. Managerially, SWs should professionalize operations, diversify revenues, and manage financial structures to reduce risk and support sustainable profitability without compromising social goals. Policy-wise, targeted support via tax relief, subsidies and grants, strategic public procurement, improved access to finance, and training/consultancy can enhance SW sustainability, with special attention to NP SWs’ societal role. Future research could extend the analysis to WISEs in other countries and to broader social enterprise forms meeting EU criteria, and deepen measurement of social value creation with richer datasets.

• External validity: The study focuses on Spanish SWs, one type of WISE, within a specific legal-institutional context; cross-country differences in employment systems and WISE definitions may limit direct generalization. - Data constraints on social value: Limited availability of standardized social impact indicators constrained social efficiency measurement; broader social datasets would enrich analysis. - Scope for future work: Incorporate WISEs from other countries once comprehensive lists are available; analyze other social enterprise forms in Spain that meet EU operational definitions to enable comparative assessments.