Can Credit Market Signalling Improve Labor Market Outcomes?

According to a Survey by the Society for Human Resource Management [6], 25% of human resource representatives interviewed in 1998 indicated that the companies they worked for ran credit checks on potential employees while the fraction increased to 43% in 2004. In this paper, we explore how such credit checks (information on observable credit market actions) might help separate workers with heterogeneous unobservable productivity. Ever since Spence [7], we’ve known that observable actions which are correlated with unobservable productivities can be used to separate workers. We show by means of example that if the number of observable actions in the education market is smaller than the number of unobservable types, then it might be efficient for employers to include observable credit market actions in their Bayesian assessment of worker type. We then assess the welfare 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. ∗We wish to thank Tom Crossley and Hamish Low for helpful comments on this project. E-mail: [email protected], [email protected].