“No More Credit Score”: Employer Credit Check Bans and Signal Substitution

42 Pages Posted: 8 Sep 2016 Last revised: 12 Sep 2016

See all articles by Robert Clifford

Robert Clifford

Federal Reserve Banks - Federal Reserve Bank of Boston

Daniel Shoag

Harvard University - Harvard Kennedy School (HKS)

Date Written: March, 2016

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.

JEL Classification: J78, M50

Suggested Citation

Clifford, Robert and Shoag, Daniel, “No More Credit Score”: Employer Credit Check Bans and Signal Substitution (March, 2016). FRB of Boston Working Paper No. 16-10, Available at SSRN: https://ssrn.com/abstract=2836374

Robert Clifford (Contact Author)

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

600 Atlantic Avenue
Boston, MA 02210
United States

Daniel Shoag

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

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

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