David R. Henderson  

Limiting Unpaid Internships: One Unintended Consequence

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If you have been following the news on unpaid internships lately, you will have noticed that they're becoming increasingly at risk legally. Here's an excerpt from a recent news story in USA Today:

The controversy over unpaid internships escalated recently when a federal judge in New York ruled that Fox Searchlight Pictures violated minimum wage and overtime laws by not paying interns who worked on production of the 2010 movie "Black Swan."

The decision by U.S. District Judge William H. Pauley III may lead some companies to rethink whether it's worth the legal risk to hire interns to work without pay, some experts say.

I won't rehash here why I think this particular interference with freedom of association is a bad idea. If you want to see my more extended thoughts, check here and here.

Instead, I want to point out a consequence of severely limiting, unpaid internships. I think it's unintended.

But to see the irony, you need to understand one particular argument of many of those who argue against unpaid internships. One critic, Derek Thompson, wrote that unpaid internships cause:

a widening of the social inequality gap as lower-income students are implicitly barred from this so-called "educational" experience, which is their gateway to full-employment in the field of their choosing.

Although Thompson's use of quotation marks around the word "educational" suggests that he was being snarky, in the discussion on my first post, he admitted that such internships are often educational. That, in his view, is what helps cause the problem: because people from lower-income families have more trouble working without pay, they have a disadvantage.

Here's the interesting new thing, a point I didn't raise in the first discussion because I didn't think of it. Let's say that people like Derek Thompson get their way and that offering unpaid internships becomes legally very risky. What happens next?

One big advantage of a free market is that it brings together people who are strangers. So, for example, a major business can offer an unpaid internship to someone who has no connection with the firm. But if the business fears getting sued later, it will be much more hesitant to offer that internship. In what situation would the business be at less risk? When it offers an unpaid internship to someone that the firm's owners or managers know, someone in their social circle. Why? Imagine that I offer an internship to the daughter of a good friend of mine. If the daughter accepts, then I am not as fearful that she will sue later. I know something about her ethics from knowing her father. And even if she is inclined to sue, her father will, because of our friendship, be likely to talk her out of it.

So the ironic unintended consequence is that making unpaid internships legally risky gives the person who has social connections to the business an added advantage in the competition for an unpaid internship. If it's the case that the people offering unpaid internships tend to be higher-income and that the people they're connected with tend to be higher-income--as I think it is--then making unpaid internships legally risky will help exacerbate the very problem that Derek Thompson and others have with unpaid internships.

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CATEGORIES: Labor Market

COMMENTS (18 to date)
Ted Levy writes:

Why isn't the obvious consequence of making unpaid internships illegal the internalization of costs by making people pay, say, $10,000 for an internship that pays, say, $10,000? Surely the government cannot make illegal the sale of a legal business service.

MingoV writes:

I agree with Ted Levy. My version of the loophole is for a business to offer an on-site, real world, educational experience for $400 per week. Trainees are paid $10 per hour for the productive component of their on-site time. Net cost for business: $0. Net income for trainee: $0.

Jacob A. Geller writes:

I've always thought that "minimum wage" is a misnomer -- it's not a "minimum" wage, it's the upper bound of a range of wages that are illegal to pay, namely those between $0 and $7.25.

But if $0 is made illegal, then the "minimum wage" really will be a "minimum" wage...

S writes:

It seems that if one really wanted to help the poor, and ill-connected by banning "educational" experiences, one could do worse than banning college. :)

Seriously though, this is a bad idea. It is not inconceivable that some time down the road free internships are illegal, but ones where the intern pays are not.

Neal W. writes:

The thing that bugs me about unpaid internships is that I pay the University full tuition for those credit hours but the University offers me no service in return.

Yancey Ward writes:

Thompson's objections never made any sense to begin with. To argue that it is discriminatory, one must assign a high educational benefit to the intern themselves. Of course, Neal W. above really nails this point beautifully.

Seth writes:

I file this issue in the "things must be pretty good if we're discussing this" category.

Just as an observation, I've known quite a few poor folks who still managed to find ways to take unpaid internships.

KH writes:

Wait for it: surely soon there will be suggestion for a government-run aid program for helping low-income people take unpaid internships.

Emily writes:

If the government starts enforcing the rules on this, major business will respond by eliminating unpaid internships or making sure they're in compliance. (For instance, by only allowing students who are getting college credit.) They have resources worth being sued over and someone who is paying attention to this stuff. It's the smaller businesses who are more likely to continue to use unpaid internships and rely more heavily on personal networks to fill them.

But the larger issue is that employers of all sizes in many fields are still going to need some way to deal with the glut of labor that is caused in large part by the market not being allowed to clear. Some unpaid internships will become paid internships, but certainly not all of them - and now there will be more people who want those jobs. Employers are not going to be filling those jobs by lottery. The two most plausible mechanisms that I see for how they're going to fill that new lowest rung are relying more heavily on personal networks and adding educational requirements.

Derek's offered no alternative hypotheses regarding how employers would choose among the many people who are willing to work for free for them and why that new mechanism would be better for poor people than unpaid internships. At least an unpaid internship is free - getting additional educational requirements actually costs money.

Cory Sanders writes:

Unpaid internships give companies the availability to unlimited FREE labor and provide limited jobs in PAID positions afterward.

Realistically, how is a student supposed to pay his living expenses AND work at a fulltime unpaid internship? It is physically impossible. Most, if not all, internships are 30 hour a week jobs which are scheduled between the hours of 8am to 6pm. So how is a person supposed to work at his paid job AND unpaid job without straining himself physically and mentally while at the same time give his best performance at the unpaid position in hopes that he can get one of the few paid positions?

Paid internships provide a chance for the intern to work at their best while being able to pay their bills. So paid internships allow low-income students to gain experience and not stress about making a living on the side.

Personally, I couldn't get an internship in my field (Economics and Finance) for that reason. I worked 30+ hour weeks all thru school and missed the opportunity to work in my field.

Also note that companies can't "hire" you as an intern once you've graduated. You have to be either currently attended classes or be between semesters.

[minor coding fixed--Econlib Ed.]

Garrett G writes:

Lower income people are implicitly barred from seeking minimum wage "skill-building" jobs because they can't afford to forgo the differential income needed to cover their necessities in the way people from higher income households can.

It's fun to make up nonsense! Cargo Cult Science thinking makes rationalizing everything so easy. (For those who haven't read it, look up Richard Feynman's brilliant 1974 CalTech commencement address.) The deeply flawed
reasoning disturbs me more than the potential consequences.

Joyce M writes:

a few thoughts...

would the income difference between an unpaid internship and an internship that pays minimum wage really permit an "intern" to focus solely on the duties of the intern job?

I doubt it.

if we are honest, young professionals are being compensated, just not in dollars. Their compensation is via the opportunity to observe and interact in real world professional situations, alongside an experienced mentor.

every young professional should have a financial PLAN to survive the diminished income from a short period of unpaid internship, expecting that the experience will bring them skills and points of view that contribute to successful hiring in a full-time position. Up until now, internships seem to find their justification in a short term sacrifice for a long-term gain.

to earn a teaching certificate in many, if not all states, candidates must PAY for the college credit to enroll in the semester-long unpaid internship. They assume the full-time responsibilities of a teacher under the supervision a certified teacher. in what world will the student teacher be paid to fulfill that requirement?

young professionals entering fields that do not REQUIRE an internship should be grateful for their options!

and everyone should be grateful that until now the government has not taxed interns on the economic "value" of their internship experiences.

Maniel writes:

"So the ironic unintended consequence is that making unpaid internships legally risky gives the person who has social connections to the business an added advantage in the competition for an unpaid internship."
This is also one consequence of the so-called "minimum wage," which as Mr. Geller points out, is simply a law against working at certain (low) rates. Small, family businesses -- restaurants, hand laundries, etc -- simply ignore this law. The resulting modest labor costs of these enterprises, which employ family members, gives them higher survival probabilities than businesses which must pay rates determined outside the marketplace. The minimum wage offers a partial explanation of the "surprising" success of new arrivals to the country -- they are able to find low-paying jobs (within the ethnic community if not within the family) and thus, gain on-the-job experience.

[minor coding fixed--Econlib Ed.]

Chris Koresko writes:

I wonder if Derek Thompson would argue that young people too poor to afford the education provided by unpaid internships should instead be getting it at $25K/year colleges.

Peter Hurley writes:

Ted & others,

There are laws that very specifically ban what you are proposing. You cannot charge money to people in order to get a job. These laws are less publicized than min wage laws, but they exist, and any employer proposing that would get their butt kicked by the government.

That said, I actually am employing an intern this summer. He offered to work for free, but we are paying him. There are a few reasons we're paying him.

1. I legitimately don't like the legal risk.

2. I feel comfortable asking him to do things that have little if any tutorial value and are just tasks that need doing (putting together booklets to mail out to clients, for example).

3. He has a much stronger incentive to show up reliably and not get fired, while in the scheme of things, the $216 a week we're paying him (it's part time) is not terribly much money.

Thomas Sewell writes:


Wait for it: surely soon there will be suggestion for a government-run aid program for helping low-income people take unpaid internships.

And shortly thereafter we'll see a big diversity initiative for the program, resulting in the minority children of well-connected, rich and successful minority parents qualifying for most of the unpaid internships in the government-run aid program.

I find it hard to believe that it's really been six years since my last blog post on Internship and apprenticeship, but I still think as credentialism declines in higher education, internships and apprenticeships will naturally become how people prove their actual worth and skills.

So of course, it makes sense for the old-guard to increasingly attack those alternatives.

Cyrus Varza writes:

Another advantage of unpaid internship along with the 'educational' experience is the spreading of administrative costs. It think Thompson does not realize that unpaid interns have a comparative advantage in doing administrative (or other) work, compared to if higher level managers would be doing the same work due to other work that could have been done in its place.

In other words, I think educational experience is just one piece of the pie.

Charley Hooper writes:

So Thompson is really saying that there is a group of people who matter (low-income people) and another group who don't matter (high-income people) and the government, which represents both groups, should actively try to hurt the one group without any proof that these actions will help the second group.

Even with the proof, that would violate the principles of representative government. Without the proof, it is spiteful.

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