Do local hiring conditions increase job creation for local residents?

This piece by Henry Overman, Principal Investigator of the ESRC-funded What Works Centre for Local Economic Growth, has been reposted from the What Works Centre for Local Economic Growth.

In January 2016, the WWCLG launched a report on the impact of Area Based Initiatives (ABIs). These are strategies aimed at improving deprived and tightly defined geographical areas by boosting their local economy, ideally, by creating new jobs rather than just displacing jobs from elsewhere. Some ABIs, such as Empowerment Zones in the US, include incentives or requirements to encourage firms to hire local residents. It’s hoped these requirements will increase the proportion of jobs that go to local residents rather than to workers who commute into the area.

Our latest toolkit considers the effect of these local hiring conditions and tries to answer two questions: Does imposing local hiring conditions impede overall job creation? And, does adding local hiring requirements improve employment outcomes for local residents?

The evidence shows that slightly more than half of the schemes did bring jobs to targeted areas (although some of these jobs may be displaced from surrounding areas). Interestingly schemes with local hiring requirements were slightly more likely to create jobs in the ABI – about three quarters showed positive job creation compared to around a third of schemes without a requirement.

But did these jobs go to local residents? For the evaluations that looked at this question, a little over half the schemes did bring jobs to local people. However, schemes without local hiring requirements were just as likely to create jobs for local residents.

Why would adding local hiring requirements help create jobs overall, but not necessarily for local residents?

One possible explanation to reconcile these two findings is that the local hiring requirements are not strong enough to influence hiring decisions. So, for example, the higher impact on job creation could be because schemes with local hiring conditions are more generous (and it’s the generosity that explains more job creation). At the same time, the local hiring conditions may be set so low that they don’t end up creating additional jobs for local residents. And if other local residents face other barriers to work – e.g. regarding skills – that means that local employment opportunities are not the only issue that needs to be addressed.

One way to address the gap in our understanding would be to have these local hiring conditions introduced in some existing schemes, but not others (that would be possible in the UK) and the impact on local hiring tracked and compared over time. Schemes might also usefully try to assess the percentage of jobs that go to local residents and experiment with the introduction of binding local hiring constraints that impose marginal increases in the percentage of jobs going to local residents. It’s important to stress the ‘marginal’ increases. Tempting as it is to assume that the findings on the impact on job creation suggest a free lunch (i.e. because there’s no effect on overall job creation) we’d urge caution in that interpretation. As in many situations, gradual piloting and testing may be the best way to increase our understanding of how these ABIs work in practice.