Monday, September 26, 2011

The recession lets employers get away with weird stuff

These days, if you apply for a job, there's a better-than-even chance that the employer is going to check out your credit history. Felix Salmon surveys the evidence against this emerging practice:
There is a lot of reason to believe that using credit reports to judge candidates will lead to unfair outcomes. Consider, for instance, a case the Department of Labor won against Bank of America which revealed that by using credit checks in its application process for entry-level jobs, Bank of America excluded 11.5% of African-American applicants, but only 6.6% of white applicants. Who else might reliance on credit reports work to exclude? Well, the major causes of bad credit are things like divorce, large medical bills, and unemployment. So, maybe divorcees, the uninsured, and the currently jobless?

Now, one might argue that while such a situation is unfortunate, it is nonetheless part of a bigger picture. By judging job candidates on debt-to-income ratio, accounts in collection, foreclosures, bankruptcies, and education and medical debt (all things firms report will make them less likely to hire a candidate), employers are helping to ensure that they wind up with good workers.

The only problem is, there isn’t any evidence that credit is an indicator of how reliable a worker will be, or the likelihood that he will embezzle or otherwise steal. As a lobbyist for TransUnion testified in front of Oregon legislators last year: “At this point we don’t have any research to show any statistical correlation between what’s in somebody’s credit report and their job performance or their likelihood to commit fraud.”
We all know that the recession is putting people out of work, but I think Felix's post gives us a little bit of a window into how the recession can also warp the process of getting a job. Ordinarily, you wouldn't expect firms to turn away qualified applicants, because doing so only shrinks the pool of potential employees and increases the price of labor. In an ordinary economic environment, companies should quickly abandon ineffectual screening mechanisms like credit history checks, because they drive up the cost of finding new employees and provide little or no benefit in return.

Currently, however, we're living in an economy with a surplus of cheap labor. It's a buyer's market, and firms can adopt discriminatory hiring policies without fear of financial consequence. This has a number of pernicious effects. It can lead to the expression of sublimated prejudices (unemployment among blacks has absolutely skyrocketed relative to unemployment among whites). And it can lead to the substitution of arbitrary credit elitism in place of rational hiring practices.

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