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Employer Credit Checks: Poverty Traps versus Matching Efficiency

P. Dean Corbae () and Andy Glover

No 2018-063, Working Papers from Human Capital and Economic Opportunity Working Group

Abstract: We develop a framework to understand pre-employment credit screening through adverse selection in labor and credit markets. Workers differ in an unobservable characteristic that induces a positive correlation between labor productivity and repayment rates in credit markets. Firms therefore prefer to hire workers with good credit because it correlates with high productivity. A poverty trap may arise, in which an unemployed worker with poor credit has a low job finding rate, but cannot improve her credit without a job. In our calibrated economy, this manifests as a large and persistent wage loss from default, equivalent to 2.3% per month over ten years. Banning employer credit checks eliminates the poverty trap, but pools job seekers and reduces matching efficiency: average unemployment duration rises by 13% for the most productive workers after employers are banned from using credit histories to screen potential hires.

Keywords: employment; unemployment; wages (search for similar items in EconPapers)
JEL-codes: E24 E44 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-mac
Note: M
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http://humcap.uchicago.edu/RePEc/hka/wpaper/Corbae ... ching-efficiency.pdf First version, August 29, 2018 (application/pdf)

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