New Research Examines Impact of Credit Screening on Employment

February 26, 2016

 

The use of credit information for employment screening has increased significantly over the last two decades, and industry surveys indicate that such screening is used by 47 percent of employers. This screening tool has come under fire, though, by politicians and community groups that claim it unfairly penalizes minority and other vulnerable applicants. In response to these fears, a number of state governments have passed laws restricting the use of credit information by employers. The first of these laws was passed in Washington in 2007, and as of this writing, eleven states and three municipalities have such laws on the books. Thirty-one other states have considered similar laws. 

Though state and local bans on the use of credit information have become increasingly popular, there is currently little research on their economic impact. In a new research paper co-authored by Harvard Kennedy School Assistant Professor Daniel Shoag, new data on employer credit checks and employment shows that these bans increased employment of residents in the lowest credit score areas. The researchers found that the largest gains occurred in higher paying jobs and in the government-sector.

Using a large database of job postings from Burning Glass Technologies, the researchers also show that employers increased their demands for other indicators of applicants’ job performance, like education and experience.  This shift of employers’ focus to other performance indicators may explain why they found, on net, that 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, groups commonly thought to benefit from such legislation.

“This paper is of special import to policy-makers in New England. Connecticut and Vermont were among the first states to institute a ban on credit checks, and Rhode Island, Massachusetts, New Hampshire, and Maine have considered or are considering similar legislation,” the authors write. “Many of New England’s metropolitan labor markets have disproportionately more young people, whose labor market outcomes are potentially affected by these bans. Quality research on the impact of these bans can meaningfully guide the ongoing policy discussions in this region.”

The study is co-authored by Robert Clifford, senior policy analyst and advisor with the New England Public Policy Center at the Federal Reserve Bank of Boston.

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Tags: Finance Finance , Labor Economics Labor Economics , Labor Relations Labor Relations

Daniel Shoag

Assistant Professor Daniel Shoag

“Many of New England’s metropolitan labor markets have disproportionately more young people, whose labor market outcomes are potentially affected by these [credit screening] bans." --Daniel Shoag and Robert Clifford


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