A number of people (Slacktivist, Kevin Drum, Matt Yglesias, Megan Mcardle) are debating the use of credit scores in employment. Credit scores are useful at predicting all kinds of things including, for example, car accidents so there is good reason to believe that they are useful in employment. The above commentators tend to focus on the potential for scores to hurt the poor but that is not obvious. Consider a similar issue: Should employers be allowed to use background criminal checks when hiring?
One argument against is that black men are more likely to have criminal backgrounds and thus these criminal background checks discriminate against black men. Let's put aside the normative issues. What’s surprising is that under plausible circumstances criminal background checks can lead to an increase in the employment of black men. The reason is that without the background check employers face a risk that their employees are ex-cons. If employers are very averse to hiring ex-cons then they will seek to reduce this risk and one way of doing so is by not hiring any black men. As a result, a background check allows non ex-cons to distinguish themselves from the pack and to be hired. Furthermore, when background checks exist, non ex-cons know that they will not face statistical discrimination and thus have an increased incentive to invest in skills.
Consistent with this reasoning, although not demonstrative of the net effect, Holzer, Raphael and Stoll find that:
…employers who check criminal backgrounds are more likely to hire
African American workers, especially men. This effect is stronger among
those employers who report an aversion to hiring those with criminal
records than among those who do not.
My view is actually that criminals face too many post-crime impediments to reintegrating themselves within the workforce. Private incentives not to take a risk on an ex-con do not cohere with social incentives to reintegrate workers into society and thus we get too little hiring of ex-cons. As a result, ex-cons face a low opportunity cost of recidivism.
Nevertheless, banning criminal background checks or credit scores is probably not the best way to combat these types of problem. Banning criminal background checks increases the incentive to rely on less accurate statistical discrimination which discriminates against the innocent and reduces the incentive to invest in skills. In short, hiding the bad apples among the good comes at the expense of the good.