Employer Credit Checks: Poverty Traps Versus Matching Efficiency

63 Pages Posted: 17 Sep 2018 Last revised: 29 Apr 2023

See all articles by Dean Corbae

Dean Corbae

University of Wisconsin - Madison

Andrew Glover

University of Texas at Austin - Department of Economics

Date Written: September 2018

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

Corbae, Dean and Glover, Andrew, Employer Credit Checks: Poverty Traps Versus Matching Efficiency (September 2018). NBER Working Paper No. w25005, Available at SSRN: https://ssrn.com/abstract=3246828

Dean Corbae (Contact Author)

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Andrew Glover

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

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