The Impact Unpaid Internships Have On The Labor Market

Internships have been used as a rite of passage by traditional, non-traditional and older/returning students to either enter a new field or change a career or profession. The dramatic increase in unpaid internships has given rise to favorable and unfavorable arguments based on their impact on the students/interns, the labor force and the economy as a whole.

The Concept of an Internship
The concept of an internship is an evolved version of apprenticeship which dates back to medieval times and referred to as the on-the-job training offered by a skilled laborer to an inexperienced (apprentice) person under the condition the apprentice would work for the 'trainer' for a certain length of time. An internship is based on the same concept. However, it is more exploratory and less limiting than an apprenticeship since it does not require the intern (apprentice) to work for the same trainer (employer) under whom the training was received. At the same time, the employer/trainer does not guarantee employment upon successful completion and expiration of the internship. Further, apprenticeships refer to blue-collar laborers compared to internships which refer to white-collar workers preparing for professional careers. Internships can be used by traditional, non-traditional and returning students alike as a pathway to future full-time employment, and they have become a requirement for graduation by some institutions of higher education.

They tend to be short-term (six to 12 months) and involve the experience gained by the student/intern in exchange for services to the trainer/employer. Internships are classified as research-based or work experience (the majority) or virtual (working remotely). Additionally, they can also be paid, either for academic credit or non-credit, or unpaid. Paid internships usually offer low compensation and unpaid internships are usually accompanied by faculty recommendation letters.

The ones without compensation are subject to more stringent labor guidelines. Internships are governed at the federal level, but some states have their own regulations (e.g. California) requiring interns to receive college credit for their work. The U.S. Department of Labor's Fair Labor Standards Act (FLSA) prescribes standards for the basic minimum wage and overtime pay, affecting most private and public employment, and requires employers to pay covered non-exempt employees at least the federal minimum wage. If overtime occurs, it is paid at one-and-one-half-times the regular rate of pay.

Parties Involved and Their Benefits
The parties involved in internships (paid or unpaid) are the student/intern, the employer, and usually the academic institution the student/intern attends or from which he or she graduates. There are certain benefits for each constituent involved, and each party plays a synergetic role in the short- and long-term effects of internships on one another, the labor force and the economy as a whole.

Benefits to Employers
Unpaid internships provide numerous benefits to employers. Employers can use internships as a cost-effective recruiting strategy for services received at no cost (compensation) to them. This lowers or eliminates the employer's labor cost (or paying taxes on wages) for interns. The opportunity to screen trainees while getting acquainted with their quality of work and performance is valuable to employers, as it facilitates their decision-making process on who they can extend an offer for future employment to. If the interns can maintain their internship by showing measurable progress when performing duties assigned by the employer, they may have a good chance of securing a full-time position at the organization.

Employers convert interns to full-time employees seamlessly, which reduces or eliminates any training-related costs. Employees who start out as interns are also more likely to stick around than those who did not start as interns. Interns bring energy, perspective and fresh ideas to employers - especially in the technology sector since the younger generations tend to be very tech-savvy. An indirect benefit to the employer is that interns keep current staff on their toes. Current employees may strive for consistent and sustained high performance in fear of being replaced by someone younger, more eager, more enthusiastic and with fresher ideas.

Benefits to Students/Interns
Students/interns benefit from internships by gaining valuable experience, and they often get a unique inside perspective on their primary career field, which can help them in their decision-making process on the career of their choice.

An internship can also show interns the relevance of their academic studies to the real world, and allow them to get a head start in their field with the possibility of securing a job upon graduation or shortly thereafter. Former interns have a competitive advantage over other job seekers since they can use the skills they acquired during the internship, such as professionalism and application of different leadership styles, and implement them in the workplace.

Interns also have the opportunity to network with other people in the same field, which can facilitate transitioning form one job to another. If the internship is a paying one, it may provide them with additional income to support some of their expenses while they gain maturity, confidence and the exclusive opportunity to work with specific types of equipment available only through an employer.

Benefits to Academic Institutions
Colleges and universities also benefit from internships since their student interns tend to bring their real-world experience back to the classroom, which helps keep courses relevant and curriculum up-to-date with the current trends. This results in a richer learning experience for everyone. Successfully-arranged internships establishing a pathway for student graduates to gainful employment validate the university's curriculum in a working environment, improve graduation rates and may accelerate corporate fundraising efforts. Internships provide more valuable learning experiences than case studies and lectures and connect faculty to current trends within various professional fields. The result is more competitive and employable graduates, increased program credibility, student excellence and stronger bonds with alumni who can benefit the institution in various ways. Therefore, the academic institution is more attractive to prospective students if they know that their chances of obtaining employment after graduation is above average compared to other competing institutions for student enrollment. If internships are academically initiated, there is also a financial benefit to the institution since it collects tuition for semesters their students are internship engaged.

Synergetic Effect
Employers have the opportunity to contribute to the molding of the lives of the students/interns in conjunction with the academic institution the students/interns attend or are graduating from.

Best Practices for Internships
There are many ethical issues involved with internships. The best practices for successful internships for educational institutions, employers and students/interns, as identified by the National Association of Colleges and Employers (NACE), are:

  • The employer should provide a company and worksite orientation that clarifies internal rules, operating procedures and internship expectations.

Key personnel and managers should be introduced to the interns and the interns should receive an overview of the company's organizational structure. The employer should ensure the intern has regular contact with a designated supervisor, who will complete a performance review at the conclusion of the internship. The employer should identify the selection criteria (including a proper resume and formal interview) for students/interns, and interns should compete for the internship as they would for a full-time position.

Older/Mature Interns
The traditional perception of an internship is that it applies to young, inexperienced, fist time job seekers. However, internships also benefit older interns returning to school to receive additional training to enhance their existing skills. Internships can be a rite of passage, and they can help older interns to change careers, enter a new field or avoid long-term unemployment. Fields directly impacted by economic fluctuations compared to more insulated ones - such as healthcare, education, the military - tend to create a new supply of older interns who may be job dislocated and are seeking to either change careers or improve their marketable skills.

Those interns share similar benefits with their younger counterparts who are recent graduates and first time job seekers. Older more mature interns can use internships to succeed in their transition to another field, despite any possible exposure to mockery by younger interns or a belief by employers that they are overqualified for the tasks they may be assigned to do. Sometimes older interns offer their services pro bono, which may lead to a new job based on work performance. Older interns tend to demonstrate a stronger work commitment and ethic because they often care for family members and meet other obligations. This fact often makes them feel they have fewer choices compared to their younger counterparts. Unpaid internships often attract early retirees looking for a way to still feel productive and generate extra income to supplement their retirement.

Paid Versus Unpaid Internships
Unpaid internships have been controversial due to, apparently, more benefits for the employers than the students/interns. Although remuneration is at the discretion of the companies offering the internships, employers should recognize that a small salary or wage is likely to generate more interest among interns. The FLSA states that no employment contract exists between interns and the employer/trainer when the training received by interns is in the private for-profit sector. It is unpaid and for their own educational benefit. These six specific criteria must be met:

  • The internship experience is for the benefit of the intern.

Unpaid Internships and Their Impact on Interns, the Labor Market and the Economy
In recent years, unpaid internships have experienced an exponential growth for a variety of reasons such as the failure of the Department of Labor to enforce minimum wage, new internship coordinators and consultants, and economic recessions. This dramatic growth raises the question whether unpaid internships have beneficial or detrimental effects on the student interns, the labor force and subsequently the economy as a whole. The answer depends on a variety of perspectives including the numerous criteria used to determine unpaid internships' impact, the opportunity costs and their monetary and non-monetary valuation (subjective nature), and the short- and long-term effects at the microeconomic and macroeconomic levels.

Some questions pertinent to unpaid internships are: Are they are legal or are they violating any labor laws? Are they ethical and moral? Are they fair or exploitative to student interns? Do they reward hard work? Are they triggered by economic recessions or do they contribute to them? Do they exacerbate socioeconomic inequalities? Are they hurting younger interns compared to older and more mature ones? How do they impact social and economic mobility of labor? Do they violate one of the basic economic principles that people respond to monetary incentives? What is their impact on the labor market and the economy as a whole?

Internships are legitimate and within the bounds of labor laws if they meet FLSA's six criteria. However, there are cases where not all six of them were met which resulted in law violations such as replacing or displacing existing full-time employees with former interns. The widespread opinion is that despite the existing labor law some employers do exploit interns independent of academic level, and this is induced by high unemployment and a poor state of the economy. Additionally, some companies are not using internships the way they are intended. Internships are supposed to be recruiting pipelines to bring in new talent. Instead they are being used as a way to free labor where employers are cycling through interns without any intent to hire them on a full-time basis. This results in displacing existing full-time workers and increasing unemployment. The Department of Labor has actually started cracking down on employers who fail to follow the rules and do not pay the interns properly.

Ethics and morals are of subjective nature and exist in various degrees. Therefore, opinions differ on whether unpaid internships are ethical or moral. Some students consider it unethical and/or immoral to accept an unpaid internship and so do some academic institutions which do not support them.

Are unpaid internships fair or exploitative to student/interns? The answer depends on whether the internship will lead to a full-time job as well as each intern's perception and criteria when evaluating an internship such as the short- and long term costs, benefits, and opportunity costs. In the short term, interns may not be receiving monetary compensation. In the long term, the internship experience, the opportunity to network or a letter of recommendation may pave the way to a full-time job, and those benefits will be valued differently by each intern.

An internship paid or unpaid is necessary when it is used as a trajectory for a graduate to reach his or her goal of obtaining gainful employment in his or her chosen career path. If that goal is reached, then hard work is rewarded. The National Association of Colleges and Employers (NACE) indicates that paid internships have a higher chance of leading to a paying job compared to the unpaid ones since most interns who had job offers accepted positions. Sixty percent held a paid internship compared to 37% of those who worked for an unpaid one. Unpaid internships also tend to provide trainees fewer skills compared to paid ones whose interns, 70% of them, found employment upon completion of their internships. A survey by the Institute on Education and the Economy at Columbia University's Teachers College found that paid internships are stronger in all measures of internship quality compared to unpaid ones.

Unpaid internships contribute to recessions as well as are triggered by them. Tough economic conditions with an economy experiencing cyclical and structural unemployment make interns flock to unpaid internships in hopes of transitioning to a full-time paid job. At the same time, an increased supply of free labor tends to displace full-time workers and increase unemployment, which contributes to worsening economic conditions and failing to reach one of the macroeconomic goals of full employment.

Socioeconomic inequalities are exacerbated by unpaid internships since they either reduce or eliminate opportunities for minority applicants of disadvantaged socioeconomic backgrounds, and it raises the question of equal access to opportunity. It seems that they tend to close off opportunities for minority applicants or people coming from disadvantaged backgrounds since high-quality and prestigious internships tend to favor the students/interns who come from affluent or relatively wealthy families and can afford to work for free. This results in depriving the less socioeconomically fortunate students of such opportunities, and it promotes greater inequality by having the top economic tier becoming less and less diverse.

It can be argued that unpaid internships hurt the younger interns more than the older and more mature ones if the younger interns cannot afford to work for free (socioeconomically disadvantaged) whilst older and more mature ones may be able to afford to accept an unpaid internship for the opportunity to enter a new field or start a new career. Additionally, older interns tend to be more stable and committed to their work tasks than younger ones due to a higher number of obligations than their younger counterparts.

Unpaid internships seem to impact social and economic mobility of labor by restricting access to internships to interns who cannot afford to move away from their domicile and relocate to where the internship is offered. This restrains economic mobility by making it increasingly difficult for people with a low economic status to accept an unpaid internship.

This has far-reaching and structural implications since it reinforces the notion that only people of privilege can have better opportunities for work compared to minorities or people of disadvantaged socioeconomic backgrounds, and it seems to lower wages across the board and reduces class mobility in the lower- and middle- class levels. Another view questions whether unpaid internships have turned into internment by restraining access to interns who cannot afford to cover their expenses during the period of their internship.

Does unpaid work violate the economic principle that people respond to monetary incentives? At first glance they do seem to violate this rule from a monetary perspective. However, they do provide non-monetary incentives such as the experience gained by the intern, the networking opportunity and a place in the interns' resume.

Do unpaid internships affect employers, the labor market and the economy as a whole in a positive or negative manner? In the short term they do not generate income or create immediate wealth so the answer is not really. The employer's income or savings generated by unpaid internships are not short term and it may or may not be spent right away. The intern income will be spent to support their current expenses.

Free labor reduces the amount of state taxes paid by employers which impacts government agencies at the local and state levels. Unpaid internships may also lead to increased efficiency and production by the firm offering the internship, due to no labor costs incurred. Labor unions see unpaid internships hurting employees' wages over the long run and by extension hurting paid internships. The labor market forces of supply and demand are supposed to provide an efficient and effective way of allocating the valuable resource of labor/human capital. However, there are some inefficiencies when price controls are imposed such as a price ceiling (government's minimum wage) or a price floor (higher wage imposed by labor unions). Efficient wages indicate that businesses can afford the cost of their inputs and can stay in the market pursuing profit maximization. If labor costs are excessive and beyond a company's capability to afford them then the company either shuts down temporarily (price less than ATC) or goes out of business (price less than AVC) exiting the market.

Operating in a monopolistically competitive market structure and following the Keynesian economic model (free market with some government intervention), a shortage of labor will increase wages or decrease them in case of a labor market surplus. Unpaid internships take labor away from paying firms and reduce the available labor supply resulting in an upward push of wages. A company has a disincentive to hire paying workers if it can hire uncompensated ones which may result in displacing existing employees thus contributing to unemployment. Another view holds that the ability of interns to earn a living and, subsequently, the labor market are hurt by undermining the job allocation based on meritocracy which rewards people for their skills rather their socioeconomic background.

Unpaid internships also distort the labor market signals at a microeconomic level by indicating that there are more paying jobs available than the actual number of available jobs, which tends to benefit schools by an increase in student enrollment and subsequent increase in school tuition due to a boosted student demand. Some employers would rather hire unpaid interns than lay off regular employees, especially if they are recent hires who do not seem to meet company's performance expectations. The non-profit organizations would be negatively impacted if they didn't offer unpaid internships since they cannot really afford to hire new employees for pay other than having volunteers to work for them with the pros and cons that accompany such an arrangement.

The Bottom Line
Increasing employability and obtaining of gainful employment are the goals of every student intern and job seeker. Internships, paid or unpaid, serve as a rite of passage to a job or a career, and they do play an important role for their constituents (students/interns, employers and academic institutions), nation's society, labor force and economy. From the employers' and academic institutions' perspective, there are numerous benefits with low or non-existent costs. From the students interns' perspective, when comparing the costs and benefits of unpaid to paid internships, it appears that the unpaid ones come with high opportunity costs and contribute substantially less to the interns' success and goal of securing gainful employment. Additionally, the current setup allows for some employers to take advantage of the lack of strict monitoring and enforcement of the labor laws, which results in intern exploitation. From the societal and economic perspectives, unpaid internships restrict access and opportunity to good jobs for people of disadvantaged socioeconomic backgrounds, constrict social and economic mobility, and have a negative impact on the economy at both the microeconomic and macroeconomic levels.

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