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Employer Credit Checks: Poverty Traps versus Matching Efficiency

Author

Listed:
  • Dean Corbae

    (University of Wisconsin–Madison)

  • Andy Glover

    (University of Texas at Austin)

Abstract

We develop a framework to understand pre-employment credit screening through adverse selection in labor and credit markets. Workers differ in an unobservable characteristic that induces a positive correlation between labor productivity and repayment rates in credit markets. Firms therefore prefer to hire workers with good credit because it correlates with high productivity. A poverty trap may arise, in which an unemployed worker with poor credit has a low job finding rate, but cannot improve her credit without a job. In our calibrated economy, this manifests as a large and persistent wage loss from default, equivalent to 2.3% per month over ten years. Banning employer credit checks eliminates the poverty trap, but pools job seekers and reduces matching efficiency: average unemployment duration rises by 13% for the most productive workers after employers are banned from using credit histories to screen potential hires.

Suggested Citation

  • Dean Corbae & Andy Glover, 2018. "Employer Credit Checks: Poverty Traps versus Matching Efficiency," Working Papers 2018-063, Human Capital and Economic Opportunity Working Group.
  • Handle: RePEc:hka:wpaper:2018-063
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    References listed on IDEAS

    as
    1. Victor Rios-Rull & Dean Corbae: & Satyajit Chatterjee, 2011. "A Theory of Credit Scoring and the Competitive Pricing of Default Risk," 2011 Meeting Papers 1115, Society for Economic Dynamics.
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    5. Per Krusell & Toshihiko Mukoyama & Ayşegül Şahin, 2010. "Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1477-1507.
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    13. Igor Livshits & James C. Mac Gee & Michèle Tertilt, 2016. "The Democratization of Credit and the Rise in Consumer Bankruptcies," Review of Economic Studies, Oxford University Press, vol. 83(4), pages 1673-1710.
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    Cited by:

    1. Gajendran Raveendranathan & Georgios Stefanidis, 2020. "The Unprecedented Fall in U.S. Revolving Credit," Department of Economics Working Papers 2020-05, McMaster University.
    2. Stefania Albanesi & Domonkos F. Vamossy, 2019. "Predicting Consumer Default: A Deep Learning Approach," NBER Working Papers 26165, National Bureau of Economic Research, Inc.
    3. Satyajit c & Dean Corbae & Kyle Dempsey & Jose-Victor Rios-Rull, 2020. "A Quantitative Theory of the Credit Score," PIER Working Paper Archive 20-030, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    4. 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.
    5. Satyajit Chatterjee & Dean Corbae & Kyle Dempsey & José‐Víctor Ríos‐Rull, 2023. "A Quantitative Theory of the Credit Score," Econometrica, Econometric Society, vol. 91(5), pages 1803-1840, September.
    6. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macro Perspective," IZA Discussion Papers 12966, Institute of Labor Economics (IZA).
    7. Tertilt, Michèle & Exler, Florian & Livshits, Igor & MacGee, Jim, 2020. "Consumer Credit with Over-Optimistic Borrowers," CEPR Discussion Papers 15570, C.E.P.R. Discussion Papers.
    8. Tertilt, Michèle & Exler, Florian, 2020. "Consumer Debt and Default: A Macroeconomic Perspective," CEPR Discussion Papers 14425, C.E.P.R. Discussion Papers.
    9. Laura Blattner & Scott Nelson, 2021. "How Costly is Noise? Data and Disparities in Consumer Credit," Papers 2105.07554, arXiv.org.

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    More about this item

    Keywords

    employment; unemployment; wages;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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