Study Finds Bans on Credit Checks by Employers May Lead to More Unemployment for Some Applicants

CreditReport

Written By ESR News Blog Editor Thomas Ahearn

A study of bans on credit checks by employers meant to help job applicants with bad credit find work revealed that people with mid-to-low credit scores, those under 22 years old, and – most surprisingly – African-Americans, were more likely to be unemployed as a result of these laws.

The study “NO MORE CREDIT SCORE” – EMPLOYER CREDIT CHECK BANS AND SIGNAL SUBSTITUTION from Robert Clifford, an economist at the Boston Fed, and Daniel Shoag, an assistant professor at Harvard’s Kennedy School, was released in February of 2016.

The study found that banning the use of credit checks in hiring decisions by employers – a rising trend in many states in the past decade – increased employment of residents in the lowest credit score areas with the largest gains occurring in higher-paying jobs and the government-sector.

Low credit score tracts (average credit score below 620) saw employment increase by 1.9-3.3% relative to similar tracts in states without bans on credit checks. However, employment declined at around the same rate in mid-to-low credit score tracts (average credit score between 630-650).

The study also revealed that employers increased their demands for other signals of the job performance of applicants – such as education and experience – rather than credit checks. As a result, bans on credit checks generated relatively worse outcomes for African-Americans.

To explore the net impact of on minority populations, the study compared labor market outcomes for African-Americas in states with and without bans on credit checks and found the introduction of these bans were associated with a 1 percent increase in the likelihood of being unemployed.

A number of U.S. states have passed laws regulating credit checks by employers. Currently, eleven states – California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington – have restricted the use of credit checks by employers.

A 2012 survey from the Society for Human Resource Management (SHRM) found 53 percent of responding organizations did not conduct credit checks on job candidates, 34 percent conducted credit checks for select job candidates, and 13 percent conducted credit checks on all candidates.

“The big walkaway point of this study is that the laws restricting employers do not always create more jobs,” say Attorney Lester Rosen, founder and CEO of Employment Screening Resources® (ESR). “They simply redistribute jobs and change the winners and losers.”

Rosen, author of ‘The Safe Hiring Manual,’ relates the study to the San Francisco Ban the Box Ordinance where employers may start using past employment as an indicator instead of criminal records. “Employers prohibited from using one criteria will simply find another criteria to use.”

The San Francisco Fair Chance Ordinance (FCO) that took effect on August 13, 2014, requires San Francisco City and County employers with 20 or more workers to follow strict rules about inquiring into and using the criminal record history of job applicants and employees.

In a blog about the FCO, Rosen writes that while the law was enacted with the best of intentions – to give ex-offenders a fair chance at employment – this particular Ban the Box law may end up as “a ticking time bomb” that could potentially hurt the ex-offenders it was meant to help.

But when Ban the Box laws go beyond the application process and simply giving ex-offenders the chance to compete on an even playing field for jobs, they attempt to regulate what criminal matters may be used in background checks that employers can consider after a job offer.

As a result, such well-meaning Ban the Box legislation may carry the unintended consequence of actually hurting ex-offenders in the job market – the very people the law was enacted to help – and also hurting unemployed individuals with a spotty work history due to the recent recession.

More Information about Credit Checks from ESR

Employment Screening Resources® (ESR), a global background check provider, offers employers helpful articles about states with laws regulating credit checks for employment and several blogs about credit checks. For more information about ESR, visit www.esrcheck.com.

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