Employer Credit Checks: Poverty Traps versus Matching Efficiency / Dean Corbae, Andrew Glover.

Format:

Book

Author/Creator:

Corbae, Dean.

Contributor:

National Bureau of Economic Research.

Glover, Andrew.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25005.

NBER working paper series no. w25005

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Employer Credit Checks

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

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.

Notes:

Print version record

September 2018.