System Working Paper 17-17

The Unintended Consequences of Employer Credit Check Bans on Labor and Credit Markets

Kristle Cortés | Federal Reserve Bank of Cleveland
Andrew Glover | University of Texas at Austin
Murat Tasci | Federal Reserve Bank of Cleveland

Published June 16, 2017

Lenders have traditionally used credit reports to measure a borrower’s default risk, but credit agencies also market reports to employers for use in hiring. Since the onset of the Great Recession, eleven states have restricted the use of credit reports in the labor market. We document that county-level job creation declines faster in states that restrict employer credit checks, although not in occupations exempt from the legislation. Furthermore, counties with more individuals with subprime credit experienced larger declines in job vacancies than average. Deterioration in the unemployment rate, although significant, was temporary. We present evidence that negative effects of these bans extend beyond the labor market. Using data from individual credit reports, we find that subprime workers experience a significant decline in credit access and an increase in credit delinquencies after a ban is enacted.

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