Why Do Employers Use FICO Scores?

A few days ago, I wrote about employers using FICO scores to screen potential employees.  One thing that neither I nor Kevin Drum really answered is:  why are employers using them?  They're at best a weak proxy.  Of course, corporations do stupid things all the time, because they're not infallible.  Still, it's a question that bears asking.

Over at CoyoteBlog, an employer offers one possible answer:  because we've made other forms of information gathering illegal.  IQ tests are out, as are any other tests that have disparate impact on minority groups.  And references have become useless:

That being said, as someone who has 500 service employees working for me, I understand the insatiable desire for information on employee reliability and conscientiousness.  A large number of our employees we hire who interview well tend to get released within 60 days of their hire.  I can't tell you how many people who seem totally normal and friendly turn out to be raving maniacs in stressful customer contact situations.

The elephant in the room that neither McArdle or folks like Kevin Drum mention is that businesses are starved for reliability information on potential employees.  It used to be the best source was to check job references.  Nowadays, though, very few employers will give a honest job reference, or will provide any information at all.  I know I am guilty of that -- my company does not allow any manager to give out performance data on past employees.  I only needed to be sued once over somehow interfering with someone's living by giving honest information about that employee's reliability to change my behavior.

I understand that this is exactly what the Left is shooting for - an environment where the competent have no advantage over the incompetent.  If employers are resorting to FICO scores, it just demonstrates how all the other reasonable avenues of obtaining information have been closed to them.

That's uncharitable, but I think there's a grain of truth in it.  And to be sure, everyone has an interest in ensuring that people who've done something stupid in the past can get a fresh start.

But no matter how valuable privacy is, it cannot be true that you have a right to control the dissemination of information about all of your public interactions.  Other people have an interest in knowing if you are a rageaholic who will cost them customers, destroy the apartment you're renting, or stiff them for goods bought on credit.

I'm not sure why credit reports should fall into the category of sacred information that no one else has a right to see.  The amount of money someone has is private--but not paying your bills is a very public action with large repercussions for others.  Why do you have an absolute right to keep others from knowing that you've stiffed a third party?

We seem to be in a situation where we are systematically depriving employers of any potential information about employees.  This is both bad for businesss, which end up with unnecessary turnover, and bad for employees, because it results in the use of less accurate proxies that aren't banned.  As Alex Tabarrok pointed out, banning inquiries about criminal history is likely to result in (illegal, but harder to detect) racial discrimination.  Imposing liability for truthful bad references results in the use of things like FICO scores.  And banning FICO scores--well, it may not be a good proxy, but what are bosses likely to use instead?

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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