Credit Reports as Résumés: The Incidence of Pre-Employment Credit Screening
49 Pages Posted: 8 Apr 2016 Last revised: 16 Jan 2017
Date Written: March 7, 2016
We study recent bans on employers' use of credit reports to screen job applicants – a practice that has been popular among employers, but controversial for its perceived disparate impact on racial minorities. Exploiting geographic, temporal, and job-level variation in which workers are covered by these bans, we analyze these bans' effects in two datasets: the panel dimension of the Current Population Survey (CPS); and data aggregated from state unemployment insurance records. We find that the bans reduced job-finding rates for blacks by 7 to 16 log points, and increased subsequent separation rates for black new hires by 3 percentage points, arguably contrary to the bans' intended effects. Results for Hispanics and whites are less conclusive. We interpret these findings in a statistical discrimination model in which credit report data, more so for blacks than for other groups, send a high-precision signal relative to the precision of employers' priors.
Keywords: Unemployment, Employment Discrimination, Signaling, Hiring, Firing, Policy Analysis
JEL Classification: J680, J780, M510, J630, D040, D820
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