Employer Credit Checks: Poverty Traps Versus Matching Efficiency.

This article develops a quantitative dynamic equilibrium model to analyze pre-employment credit screening (PECS) as a signal that mitigates adverse selection in labor markets by linking creditworthiness to worker productivity and default risk. The model shows that high-productivity workers tend to have better credit and thus higher job-finding rates, creating a poverty trap for unemployed workers with poor credit who cannot improve their credit without employment. Banning PECS eliminates this poverty trap but reduces labor market matching efficiency by pooling job seekers, leading to longer unemployment durations for high-productivity workers and shorter durations for low-productivity workers. The ban also weakens incentives to repay debt, increasing default rates particularly among high-credit-score workers, and causes a redistribution of welfare: low-risk (high-productivity) workers generally lose while high-risk (low-productivity) workers gain, with young workers benefiting more than older ones. The findings highlight a trade-off between equity and efficiency that policymakers should consider when regulating employer use of credit reports.