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

Joshua Ballance, Robert Clifford and Daniel Shoag

Labour Economics, 2020, vol. 63, issue C

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 shifted employment to people residing in census tracts with the lowest average risk score. We do this using both employment outcomes and changes in worker commuting patterns, which allow us to control for business cycle effects at very refined geographies. The largest shifts occurred in higher paying jobs and in the government sector. At the same time, using a large database of online job postings, we show that employers in low-credit municipalities subject to the ban differentially 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 mediocre risk scores, for those under 22 years of age, and for blacks—groups commonly thought to benefit from such legislation, but which may suffer from statistical discrimination.

JEL-codes: J78 M50 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:labeco:v:63:y:2020:i:c:s0927537119301058

DOI: 10.1016/j.labeco.2019.101769

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