Bankruptcy

Wanted: People with Good Credit for Low-Paying Jobs

By Katie Porter

Despite the increased proportion of Americans who are behind on their mortgages or have lost their houses to foreclosure, the practice of doing credit checks on prospective employees continues to climb sharply in popularity. The Society of Human Resources Management?s recent survey found that 60 percent of employers run credit checks on at least some job applicants; back in that ?healthy? economy of 2006, the comparable figure was 42 percent. The growth in credit checks by employers is some evidence to counter arguments that the stigma of financial distress, bankruptcy, or foreclosure is falling as more and more Americans struggle to meet their debt obligations. Employers seem to be taking the opposite tact, with the weak labor market permitting them to be increasingly selective about whom to hire. Credit checks are a fast and cheap way to screen out candidates. And one in 8 employers checks the credit of every applicant for every job--meaning that people like janitors and retail workers can suffer employment discrimination on the basis of their credit.

Legislatures and Congress have expressed concern about the use of credit checks in the employment context. In July, Rep. Steve Cohen (D-TN) introduced the Equal Employment for All Act. And a recent AP article reported that lawmakers in at least 16 states have proposed outlawing most credit checks for employment. Most of those bills continue to languish (despite in the case of Rep. Cohen's bill, 53 co-sponsors and support from organizations such as the National Organization for Women, the AFL-CIO, and the Lawyer's Committee for Civil Rights under the Law.) In California, which is the country?s largest labor market, not to mention one of its most hard-hit foreclosure pockets, Gov. Schwarzenegger vetoed a bill to regulate employment credit checks, calling it a "job killer." This is curious logic; I seriously doubt that this issue is of such importance to most employers or industries that they would relocate or spurn California on that basis. Moreover, the California Chamber of Commerce made the silly argument that this was a "costly workplace mandate." Umm . . . the bill would stop employers from doing something, saving them the money they now spend on the credit reporting agencies. How can that be a costly mandate?

On the ground everyday, the real job-killing happens at the individual level, when a person trying to climb out of financial trouble is told that they are not hired because of their poor credit in the past. We've blogged about this in the past at Credit Slips, with Debb Thorne pointing out the weakness of any empirical evidence showing that bankruptcies are evidence of "bad decisionmaking" rather than job, medical, or family problems. In this economy, foreclosures may be the result of predatory lending, an inability to get a loan modification, or a loan that is unaffordable now that falling housing prices prevent continual refinancing. Of course, bad decisionmaking by consumers is a part of the picture. But why do we think that an inability to have good credit, especially in this economy, is evidence that an employer will be tardy to work, will steal at work, or be a less diligent employee? The problem is more acute when employers use credit scores, rather than credit reports, which at least reveal more information about the problems that a potential employee has experienced. Credit scores are algorithms designed to predict the likelihood of repaying. I'm all about using credit scores for creditworthiness (indeed, there was altogether too little of this by lenders in the last decade) but credit scores are not designed to predict employment potential. We've seen the development of bankruptcy risk scores, a refined version of the credit score designed to predict likelihood of bankruptcy filing. If employers want to use credit in their decisions, they should come forward with reliable empirical evidence that shows a relationship between low credit score and undesirable employment behavior. If they don't have that data, then Congress should move forward and pass the Equal Employment for All Act. Rather than casting around aimlessly for job creation ideas, how about taking a simple step to make sure that those at the bottom of our economy have a chance to improve their lives through old-fashioned hard work.

Full post as published by Credit Slips on April 13, 2010 (boomark / email).