Santiago Truffa

Ph.D Business Administration

Labor Market Effects of Deleting Delinquencies

We study the labor market implications of prohibiting the use of financial histories to screen job applicants. We develop a simple model to show that banning the use of credit reports decreases job finding rates, while simultaneously increasing wages conditional on finding a job. The key mechanism highlighted by the model is the increased uncertainty in worker quality faced by employers, which concurrently tightens hiring rules while raising the option value of qualified workers. We test the predictions of the model by exploiting a country-wide law implemented in Chile, which limited employers’ ability to use applicant credit information for hiring purposes. Using detailed employment data, we find that the law led to longer unemployment spells and to higher wages for newly hired workers, consistent with our proposed mechanism.