Becker Friedman Institute

Research Repository

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

Employer Credit Checks: Poverty Traps versus Matching Efficiency

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.

Dean Corbae, University of Wisconsin–Madison
Andy Glover, University of Texas at Austin
Publication Date: 
September, 2018
HCEO Working Groups: 
Publication Status: 
Document Number: 
File Description: 
First version, August 29, 2018