A Paradox
I have come across this article about how some minorities get fewer jobs because of what they fought for, a ban of employers accessing their credit scores. In the exact words of the author, “in 2007 the state of Washington introduced a new rule aimed at making the labor market fairer: firms were banned from checking job applicants’ credit scores. Campaigners celebrated the new law as a step towards equality—an applicant with a low credit score is much more likely to be poor, black or young. Since then, ten other states have followed suit. But when Robert Clifford and Daniel Shoag, two economists, recently studied the bans, they found that the laws left blacks and the young with fewer jobs, not more.”
How is that possible? Well, it seems that the market for lemon can explain the result perfectly. Since the employers no longer have information about their credit scores, as suggested by the author, they may “put more weight” on other factors, such as “education and experience, which are rarer among disadvantaged groups,” according to the author. It is exactly this information asymmetry causes the tendency of some employers not to hire productive workers.
This is totally analogous to our class example. The productive minorities workers are like the good used cars, while the unproductive minorities workers are like the bad used cars. When there is no one to certify for the good used cars, just like when the access of credit scores are banned from the employer, the market fails. Originally, the employers may be willing to hire productive minorities workers given their high credit scores, and totally want to avoid the unproductive workers. This is like the buyers are willing to buy the good used car at a price slightly higher than the sellers’ value, but they don’t want to buy the bad used car at all. After the legislation was passed, the market is totally gone. Now, the jobs that were supposed to be offered to the productive minorities applicant are also gone. That’s why the total amount of jobs offered to the minorities decreased. This seems to be a paradox at first, but just like Braess’ paradox, it is not.
Link to the article:
http://www.economist.com/news/economics-brief/21702428-george-akerlofs-1970-paper-market-lemons-foundation-stone-information