'No More Credit Score': Employer Credit Check Bans and Signal Substitution

39 Pages Posted: 14 Mar 2016

See all articles by Daniel Shoag

Daniel Shoag

Harvard University - Harvard Kennedy School (HKS)

Robert Clifford

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: February 15, 2016

Abstract

In the past decade, most states have banned or have 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, and the LEHD Origin-Destination Employment data, we show that these bans increased employment of residents in the lowest credit score areas. 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 demands 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 old, and for Blacks, group commonly thought to benefit from such legislation.

Keywords: Labor Economics

Suggested Citation

Shoag, Daniel and Clifford, Robert, 'No More Credit Score': Employer Credit Check Bans and Signal Substitution (February 15, 2016). HKS Working Paper No. RWP16-008. Available at SSRN: https://ssrn.com/abstract=2746642 or http://dx.doi.org/10.2139/ssrn.2746642

Daniel Shoag (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Robert Clifford

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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