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"No More Credit Score": Emplyer Credit Check Bans and Signal Substitution

Author

Listed:
  • Clifford, Robert

    (Federal Reserve Bank of Boston)

  • Shoag, Daniel

    (Harvard University)

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.

Suggested Citation

  • Clifford, Robert & Shoag, Daniel, 2016. ""No More Credit Score": Emplyer Credit Check Bans and Signal Substitution," Working Paper Series 16-008, Harvard University, John F. Kennedy School of Government.
    • Handle: RePEc:ecl:harjfk:16-008
    as

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    File URL: https://research.hks.harvard.edu/publications/getFile.aspx?Id=1414
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    References listed on IDEAS

    as
    1. Alicia Sasser Modestino & Daniel Shoag & Joshua Ballance, 2020. "Upskilling: Do Employers Demand Greater Skill When Workers Are Plentiful?," The Review of Economics and Statistics, MIT Press, vol. 102(4), pages 793-805, October.
    2. Abigail Wozniak, 2015. "Discrimination and the Effects of Drug Testing on Black Employment," The Review of Economics and Statistics, MIT Press, vol. 97(3), pages 548-566, July.
    3. Modestino, Alicia Sasser & Shoag, Daniel & Ballance, Joshua, 2016. "Downskilling: changes in employer skill requirements over the business cycle," Labour Economics, Elsevier, vol. 41(C), pages 333-347.
    4. Holzer, Harry J & Raphael, Steven & Stoll, Michael A, 2006. "Perceived Criminality, Criminal Background Checks, and the Racial Hiring Practices of Employers," Journal of Law and Economics, University of Chicago Press, vol. 49(2), pages 451-480, October.
    5. Joshua Ballance & Alicia Sasser Modestino & Daniel Shoag, 2015. "Upskilling: do employers demand greater skill when skilled workers are plentiful?," Working Papers 14-17, Federal Reserve Bank of Boston.
    6. Matthew R. Graham & Mark J. Kutzbach & Brian McKenzie, 2014. "Design Comparison of LODES and ACS Commuting Data Products," Working Papers 14-38, Center for Economic Studies, U.S. Census Bureau.
    7. David H. Autor & David Scarborough, 2008. "Does Job Testing Harm Minority Workers? Evidence from Retail Establishments," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 219-277.
    8. Donghoon Lee & Wilbert Van der Klaauw, 2010. "An introduction to the FRBNY Consumer Credit Panel," Staff Reports 479, Federal Reserve Bank of New York.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Kristle Romero Cortes & Andrew Glover & Murat Tasci, 2016. "The Unintended Consequences of Employer Credit Check Bans on Labor and Credit Markets," Working Papers 16-25R2, Federal Reserve Bank of Cleveland.
    2. Kristle R. Cortes & Andrew Glover & Murat Tasci, 2022. "The Unintended Consequences of Employer Credit Check Bans for Labor Markets," The Review of Economics and Statistics, MIT Press, vol. 104(5), pages 997-1009, December.
    3. Joshua M. Congdon-Hohman, 2018. "The persistent labor market effects of a criminal conviction and �Ban the Box� reforms," Working Papers 1808, College of the Holy Cross, Department of Economics.
    4. Kyle Herkenhoff, 2016. "The Impact of Consumer Credit Access on Employment, Earnings and Entrepreneurship," 2016 Meeting Papers 781, Society for Economic Dynamics.
    5. Will Dobbie & Paul Goldsmith‐Pinkham & Neale Mahoney & Jae Song, 2020. "Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports," Journal of Finance, American Finance Association, vol. 75(5), pages 2377-2419, October.
    6. Cox, James C. & Kreisman, Daniel & Dynarski, Susan, 2020. "Designed to fail: Effects of the default option and information complexity on student loan repayment," Journal of Public Economics, Elsevier, vol. 192(C).
    7. Ashley C. Craig, 2023. "Optimal Income Taxation with Spillovers from Employer Learning," American Economic Journal: Economic Policy, American Economic Association, vol. 15(2), pages 82-125, May.
    8. Amanda Agan & Sonja Starr, 2016. "Ban the Box, Criminal Records, and Statistical Discrimination: A Field Experiment," Natural Field Experiments 00539, The Field Experiments Website.
    9. Marieke Bos & Emily Breza & Andres Liberman, 2018. "The Labor Market Effects of Credit Market Information," The Review of Financial Studies, Society for Financial Studies, vol. 31(6), pages 2005-2037.
    10. Anthony M. Marino, 2020. "Banning information in hiring decisions," Journal of Regulatory Economics, Springer, vol. 58(1), pages 33-58, August.
    11. J. Birkenmaier & Q. Fu, 2019. "Does U.S. Household Financial Access Mediate the Relationship Between a Large Income Drop and Credit Record?," Journal of Consumer Policy, Springer, vol. 42(2), pages 267-283, June.

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