Study: Credit Check Bans Hurt Black Job Seekers, Among Others

Laws found to boost employment for applicants with the lowest credit scores

By Roy Maurer May 6, 2016
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Laws banning the use of credit checks during the hiring process are hurting some of the very people they’re supposed to be helping, according to a recently released study.

While employment for people with the lowest credit scores has increased due to the bans, black applicants, applicants under the age of 22 and applicants with mid-to-low credit scores were more likely to be unemployed as a result of these laws, the study found.

The research from Robert Clifford, an economist at the Federal Reserve Bank of Boston, and Daniel Shoag, an assistant professor at the John F. Kennedy School of Government at Harvard University, revealed that in the absence of credit checks, employers demanded more qualifications from applicants, such as more education and experience, resulting in relatively worse outcomes for some job seekers.

Clifford and Shoag used data from the Federal Reserve Bank of New York Consumer Credit Panel/Equifax, which provides detailed quarterly credit history data on a nationally representative 5 percent sample of U.S. consumers. They then paired the credit information with data on employment outcomes from the LEHD Origin-Destination Employment Statistics produced by the U.S. Census Bureau, which provides state unemployment insurance reporting for approximately 95 percent of wage and salary jobs.

Using these data sets, the pair were able to measure the relative impact of laws banning credit checks in employment screens in the 11 states where they exist and compare them to the states where there are no such bans.

The researchers found that credit check bans raised employment by roughly 1.9-3.3 percent for residents with the lowest credit scores (below 620), especially in higher-paying jobs and in the government sector.

“Employers in the public sectors were most affected by these bans, followed by those in transportation and warehousing, information, and in-home services,” Shoag said. “Employment in construction and food service declined among residents of low credit score tracts following these bans, as people shifted to better jobs.”

Though employment increased in the lowest credit tracts following a ban, the study found that employment declined in mid-to-low credit score tracts (those with average scores between 630 and 650).

“Using new data on 74 million online job postings collected by Burning Glass Technologies [one of the leading vendors of online job ads data], we rationalize this finding by exploring employer experience and education requirements for new hires,” Shoag said. “A larger fraction of jobs in low-credit-score areas began requiring college degrees and prior work experience following a ban on credit screening.”

To discover the net impact of the bans on minority populations, the study compared labor market outcomes for black job seekers in states with and without bans on credit checks and found that the introduction of a credit check ban was associated with a 1 percent increase in the likelihood of black workers being unemployed in that state.

The researchers concluded that the prohibitions on credit screening and the increased emphasis on other qualifications may actually hurt minority applicants. If a credit-check ban went into effect, job postings in that state were more likely to ask for a bachelor’s degree and to require additional years of experience, they found.

“When firms are confronted with government-imposed restrictions on application procedures, like a ban on credit checks, they will try to come up with new ways to get an appropriate sense of which applicants to hire,” said Stan Veuger, an economist and resident scholar at the American Enterprise Institute, a public policy research institute based in Washington, D.C.

“The restrictions produce, among other things, a greater focus on applicants’ educational background. And that in turn harms the job prospects of those with more limited access to higher education, including many of the people the government allegedly set out to help.”

But Robert Hiltonsmith, senior policy analyst at Demos, a Washington, D.C.-based research and policy center, suggested that the study’s finding that employment credit check bans boost employment for those with low credit scores is the more important takeaway and that the effects on employment for black applicants need more study.

Hiltonsmith explained that just over 7 million black Americans live in the 11 states that have credit check bans; this figure represents only about 20 percent of all black Americans. In addition, most of the 7 million (83 percent) live in just three states: California, Illinois and Maryland.

“When the Clifford-Shoag study attempts to measure the employment effect of bans on black workers, it’s important to note that it’s actually essentially reflecting the effects on black workers in just those three states,” he said.

Other data shows the average increase in the unemployment rate for black workers in the three states was higher than the nationwide average increase in black unemployment, corroborating Clifford and Shoag’s results.

“However, other workers in the three ban states also saw their unemployment rate increase more than the national average, showing that the recession hit [these] states harder than it did elsewhere,” Hiltonsmith said “There are many factors that contributed to a deeper recession in California, Illinois and Maryland, but the most relevant one here is the deep cuts in public employment that occurred in each.”

He added that black workers make up a disproportionate share of the public-sector workforce and were more likely than other public employees to lose their jobs during the Great Recession.

“We can reasonably argue that the disproportionate impact of public-sector employment cuts on black workers in the three major ban states—which the Clifford-Shoag study did not control for—is likely the cause of greater increases in unemployment for black workers, not the employment credit check bans.”

Roy Maurer is an online editor/manager for SHRM.

Follow him @SHRMRoy

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