Labor Market Effects of Deleting Delinquencies

Abstract

We develop a simple model to examine the implications of prohibiting the use of credit histories in hiring practices. We empirically test the model using a recent law implemented in Chile. This law extended periods of unemployment for low-income workers, consistent with the pooling equilibrium in the market for talent predicted by our model. Moreover, these effects are particularly large for younger workers and female workers. While laws that ban credit checks for hiring purposes continue to gain traction, our paper highlights that these laws may not benefit all low-income workers and may instead lead to cross-subsidization within this group.