“No more credit score”: Employer credit check bans and signal substitution

Abstract

In the past decade, most states have banned or considered banning the use of credit checks in hiring decisions, a screening tool that is widely used by employers. Using new Equifax data on employer credit checks, the Federal Reserve Bank of New York Consumer Credit Panel/Equifax data, and the LEHD Origin-Destination Employment data, we show that these bans increased employment of residents in the lowest-credit score census tracts. The largest gains occurred in higher-paying jobs and in the government sector. At the same time, using a large database of job postings, we show that employers increased their demand for other signals of applicants' job performance, like education and experience. On net, the changes induced by these bans generate relatively worse outcomes for those with mid-to-low credit scores, for those under 22 years of age, and for blacks, groups commonly thought to benefit from such legislation.

Employer Credit Checks: Poverty Traps versus Matching Efficiency

“…1 However, since 2005, numerous state and federal laws have been introduced with the goal of limiting or banning employer credit checks and, as of 2018, eleven states have enacted such laws. 2 Legislators often express concern of a "poverty trap" arising due to employer credit checks: a worker loses her job and cannot pay her debts, which negatively impacts her credit report and thereby makes her unable to find a job. We build a model of unsecured credit and labor market search with adverse selection in which such poverty traps arise endogenously, which we use to assess the welfare consequences of policies to ban PECS.…”

“…A growing empirical literature seeks to estimate the effects of PECS on labor market outcomes. Examples include Ballance, Clifford and Shoag [2], Bartik and Nelson [3], and Cortes, Glover and Tasci [12], which is most directly related to this paper. Cortes, Glover and Tasci estimate a fall in posted vacancies following the implementation of employer credit check bans, but not in occupations that are exempted (jobs with access to financial or personal information).…”

“…http://www.ftc.gov/bcp/edu/pubs/business/credit/bus08.shtm2 The states with bans are CA, CO, CT, DE, HI, IL, MD, NV, OR, VT, WA.…”

The Unintended Consequences of Employer Credit Check Bans for Labor Markets

“…To our knowledge, ours is the first to study the effect of employer credit check bans on local labor demand (i.e., job postings). We are among the first to study the effect of these laws on labor markets in general, although two recent papers by Ballance, Clifford, and Shoag (2016) and Bartik and Nelson (2016) 6 closely related. While they consider different outcome measures and implement different empirical strategies, these studies also find that employer credit check bans have negative labor market effects on at least some workers, such as black job seekers.…”

“…On the other hand, Friedberg, Hynes, and Pattison (2018) find that people reporting financial difficulties enjoy higher job-finding rates following a ban, a finding that is consistent with the law that forces employers to pool workers more. Ballance, Clifford, and Shoag (2016) estimate the effect of bans on logemployment at the census-tract level, using annual data. Substantively, our labor market estimates differ in two ways.…”