Credit Checks and Labor Market Outcomes

According to a Survey by the Society for Human Resource Management (2010), 60% of human resource representatives interviewed in 2009 indicated that the companies they worked for ran credit checks on potential employees. In this paper, we explore how credit checks (observable signals based on an agent’s unobservable type) may affect outcomes in a matching model of the labor market. We show that it may be individually optimal for employers to use such signals to make hiring/firing/compensation decisions. Such decisions however may have important implications for household welfare inducing a poverty trap. The analysis can shed light on the consequences of a law (the Equal Employment for All Act (H.R. 3149)) prohibiting the use of credit information in employment decisions which currently sits before Congress. Very preliminary, comments welcome. ∗E-mail: [email protected], [email protected]. We wish to thank Thomas Crossley and Hamish Low for helpful comments on this project.