Area based initiatives toolkit: Local hiring requirements

What are they and what do they aim to do?

Area-based initiatives (ABIs) are policy initiatives aimed at improving growth in specific, tightly defined geographic areas. This toolkit focuses on ABIs that support businesses, such as the Employment Zone and Empowerment Zone designs commonly used in the UK, US, France and other countries, rather than ABIs that target disadvantaged individuals directly. It considers the extent to which such business-focussed ABIs generate additional employment for local residents and assesses whether explicit local hiring requirements affect the extent of local hiring.

If residents living in deprived areas have low access to employment opportunities due to a lack of jobs in the area, discrimination, or mobility restrictions, for example, then ABIs may try to break down these barriers by bringing new employment opportunities to the areas. This relies on the ABI creating jobs and those jobs being new to the wider area. That is, jobs that are not displaced from other nearby areas – a major concern for ABIs, considered in detail in our evidence review. Assuming new jobs are created, then some of these must go to local residents if they are to see labour market benefits. ABIs can impose local hiring requirements to try to increase the proportion of jobs that go to local residents.

This toolkit considers whether these local hiring requirements affect the likelihood that the ABI creates jobs, and that these go to local residents. Based on the available evidence we aren’t able to consider whether such requirements change the likelihood or extent of displacement.

Price effects – either in terms of wages or house prices – may reinforce or offset any labour market benefits. We also briefly consider these effects in this toolkit.

Examples of Local Hiring Requirements:

The aim of adding a local hiring requirement is to create economic incentives to encourage firms to hire local residents. For instance, Empowerment Zones in the US provide wage credits (up to 20% for the first $15,000 earned) for each employee living in designated areas. Similarly, US Renewal Community zones provide wages credits of $1,500 per employee living and working in the targeted community. Finally, in French Zone Franches Urbaines (ZFU), ZFU firms are offered exemption from payroll tax conditional on a proportion of their employees (33%) living in the intervention area.

Things to consider

• Will the imposition of local hiring requirements hinder overall job creation in the ABI? The evidence suggests not. If anything, schemes with local hiring requirements are slightly more likely to create jobs in the ABI.
• Will the imposition of local hiring requirements increase job creation for local residents? Despite the finding on overall job creation, the evidence suggests not. Schemes without local hiring requirements are just as likely to create jobs for local residents.
• How stringent do local hiring requirements need to be to change firm behaviour? The finding that local hiring requirements don’t negatively affect overall job creation, but don’t positively affect job creation for local residents is surprising. One possible explanation is that the local hiring requirements are not strong enough to influence either decision. This might be because constraints imposed aren’t binding (i.e. the firm would have employed local people anyway) or because incentives offered are too weak. More stringent local hiring requirements might have a bigger effect on local hiring but might also reduce job creation in the ABI. Another possibility is that residents face other barriers to work – e.g. in terms of skills – that mean that local employment opportunities are not the only issue that needs to be addressed.
• Will local hiring requirements have any other effects? ABIs with local hiring requirements are more likely to be associated with increases in local wages. But they are also more likely to lead to house price increases, perhaps because local jobs generate amenity benefits – e.g. fewer vacant buildings – even if these jobs don’t go to local residents. These wage and house price effects mean that the distributional effects will be complicated. For example, higher wage effects may come from increased displacement of existing residents. The overall effects will also depend on whether a local resident is a home-owner or a renter.

How effective are they?

We found 39 studies that look at employment effects of business-focussed ABIs. These studies provide 55 estimates of the effect on employment at firms in targeted areas or on employment of local residents (or both), 12 estimates of wage effects and 6 estimates of house price effects. Not all these studies cover ABIs with local hiring requirements and comparisons of schemes with and without requirements are the main basis on which we reach conclusions about effectiveness.

• ABIs can increase the number of jobs in designated areas, but effects are not always positive. About 55% of the 24 work-based employment estimates are positive meaning that schemes bring jobs to targeted areas. Some of these jobs may be displaced from surrounding areas.
• Local hiring requirements do not seem to negatively affect the likelihood that an ABI will bring jobs to targeted areas. In fact, for schemes with a local hiring requirement, 75% of work-based employment estimates are positive in contrast to only 33% for schemes without a requirement.
• ABIs can increase the number of local residents in employment, but effects are not always positive. A little under 55% of 24 residence-based estimates are positive meaning that schemes bring jobs to people that live in targeted areas. However, local hiring requirements do not seem to affect the likelihood that a business-focussed ABI will bring jobs to people that live in targeted areas.
• The evidence is mixed on whether ABIs improve the employment outcomes of existing residents. A small number of studies directly consider employment outcomes for existing residents. Most of these studies consider schemes that involve local hiring requirements. Two out of five of these studies report a positive effect on employment outcomes for residents.
• ABIs with local hiring requirements are slightly more likely to generate positive wage effects. Only one of four studies report a positive effect on wages for ABIs with no local hiring requirement, in contrast to four out of eight for ABIs with a local hiring requirement.
• ABIs with local hiring requirements are slightly more likely to generate positive house price effects. The four studies that consider the impact of ABIs with local hiring requirements all report positive house price effects. In contrast, neither of the two studies that looked at schemes without local hiring requirements reported positive effects.

Are they cost effective?

Unfortunately, the papers do not provide enough evidence to allow us to assess whether imposing local hiring requirements is a cost-effective way of increasing local hiring.