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Is new credit-check ban for job applications good or bad?

[1]By Patrick Emerson
Oregon Economics Blog [2]

Oregon state Senate Bill 1045 prohibits most employers from using credit checks in their pre-employment screen of job seekers.  It has passed the house and senate and awaits the Governor’s signature.

It is not clear to me where the market failure is here.  It seems to me that proponents of the bill are suggesting two problems: the information is not meaningful (good people caught due to no fault of their own), or the information is wrong.  If the information is not meaningful or inaccurate then the market should take care of the problem by itself: employers will find that using credit reports does not yield good information and costs money and time and thus they should decide that it is not worth the effort.

So if the argument that the credit score has nothing to do with whether a person will be a good employee is true then the worth of credit scores to employers should quickly be revealed to be nil and they will stop on their own.  In which case there is no need for a legislative solution.

Now there is one way in which I can see a problem that may need a legislative solution: if the information is wrong but not randomly wrong, systematically wrong.  In other words if one group’s credit scores are systematically lower due to error. For instance if racial minorities are more likely to have mistakes on their credit reports which lowers their scores.  In this case using a credit score is equivalent to discrimination (albeit unwittingly).  If this is true, however, the problem is with the credit rating agencies themselves and has many more implications than just hiring.  The solution to this problem is regulating the agencies themselves. [Note: a quick search of the literature revealed no study claiming bias in the scores themselves though the scores themselves may be indicative of discrimination – e.g. giving minority applicants access only to sub-prime loans even if they qualify for better. But also note that if using biased scores leads to discrimination on the basis of sex or race then there is already a law that prohibits such behavior – for any reason]

Employers base their hiring decisions on many factors that aren’t always in our complete control and can be victims of circumstance. A health emergency that may have ruined someone’s credit may have also caused some bad grades in college.  But GPA is an acceptable piece of information to use and no one proposes regulating using it.  Smart employers will ask why the GPA is low or the credit is bad before making their decisions, because more information in markets is almost always a good thing. For this reason, I don’t think deliberately limiting the information prospective employers can collect is a good idea.

By Patrick Emerson
Oregon Economics Blog [2]