As the job market continues to struggle and new university graduates are challenged to find employment related to their fields, unpaid internships are on the rise. On the surface, these employment arrangements benefit both employer and employee. The employer gets to preview potential new hires without having to pay them, and the employee gets invaluable training, experience for the resume and, potentially, a foot in the door for a real job.

Economists and journalists, however, bring to light the dark side of these unpaid positions. Their concern is that it exploits young workers desperate to launch their careers. A more subtle impact is the effect the practice is having on the job market itself.

Are Unpaid Internships Even Legal?
In 2010, the federal Labor Department came out with six requirements for an unpaid internship to be legal. The main requirements are that the intern receives educational training, must not displace paid workers and must not be guaranteed a job at the end of the internship. Also, the employer must not receive any immediate benefit from the internship. This last requirement is vague and it's still possible for employers to get around it. What makes illegal unpaid internships particularly difficult to stop or deter, is the fact that the Labor Department will only investigate based on complaints. Interns are unlikely to report their employers' labor violations for fear of damaging their relationship and future opportunities.

Benefits to the Employer
The benefits of an unpaid internship to a company are transparent. Although not legally sanctioned, it is practically impossible for an employer not to derive benefit from unpaid labor. An intern must actually perform some duties to be able to show that the or she is learning. An intern program can also act like a giant lobster tank, from which an employer can view the selections in the work environment and ultimately choose the best people to keep on for paid employment. It improves the quality of new hires and lessens labor law disputes down the road. An added benefit for employers is that interns who eventually work for the company will require less paid training.

Benefits to the Employee
Proponents of unpaid internship programs also outline the benefits of the arrangement to new graduates. In order to work in many industries, it is almost a standard now to work unpaid and "pay your dues" first. More graduates are fighting over fewer jobs and carry higher education debt. An internship offers relevant experience that gives graduates a better chance of working in their preferred industries.

SEE: Top 15 Interview Tips For Students

Do Internships Lead to Higher-Paying Jobs?
The increase in unpaid internship positions may be detrimental in those industries in which they are common. For interns, it may be a step up in the industry, allowing them to advance more quickly in their fields. Overall, however, unpaid jobs may be crowding out paid positions, reducing the total number of entry-level jobs available in an industry. This creates a cycle of fewer jobs and more job seekers willing to work for free to open the door.

A recent survey by the National Association of Colleges and Employers may back up that concern. Of 20,000 university graduates surveyed, only 38% of those who had participated in unpaid internships during university had received job offers by graduation.

SEE: 4 Ways To Get A Head Start On Your Financial Career

Economic Segmentation
One economic impact arising from the rise in unpaid internships isn't in dispute. In competitive industries where unpaid positions are common, interns, on average, come from a higher socio-economic class. The reason is simple: you have to be able to afford to work for free. Students that have to pay their own living expenses usually cannot afford to do so and have to pass over unpaid internships for paid work, often not in their industry of choice. The long-term impact on employers is that they will not have access to the best available talent on the market. On the other hand, students who live at home rent-free or come from wealthy families can absorb living expenses while working for free.

The Bottom Line
Although it doesn't appear that unpaid internships are going away anytime soon, concerns about the exploitative nature of the practice will continue. University graduates must weigh all of the pros and cons to determine whether an unpaid internship is right for them.

SEE: Internships: Not Just For College Kids Anymore

Related Articles
  1. Personal Finance

    How To Get That Entry-Level Financial Analyst Job

    Landing a job as a financial analyst takes study, strategy and a lot of hard work. Here's how to hone your competitive edge.
  2. Personal Finance

    Does It Make Sense to Go to College in Europe?

    If you're deciding whether to get a degree abroad, first do your research and talk to alumni who have completed the same program.
  3. Economics

    What is a Code of Ethics?

    A code of ethics is a collection of principles and guidelines an organization expects its employees to follow.
  4. Savings

    6 Ways to Save Money on College Supplies

    Tuition and room and board are big expenses, yes, but the cost of textbooks and supplies can add up, too, unless you strategize.
  5. Credit & Loans

    Four Ways to Improve Education In America

    U.S. students place 27th in math and 20th in science out of 34 countries. The United States must reform its education system or harm future economic productivity and global trade competitiveness.
  6. Investing

    How To Invest For The Greater Good

    We discuss why is important to prioritize economic, social and governance factors when making investment decisions, regardless of gender or generation.
  7. Personal Finance

    8 Profitable Majors For The College-Bound In 2015

    Choose your college major wisely to justify the rising cost of higher education. Here are 8 majors that lead to good jobs and high salaries.
  8. Personal Finance

    8 Reasons Why Valued Employees Quit

    Salaries are important, but retaining top employees requires more than just providing competitive pay.
  9. Professionals

    How Advisors Can Minimize Their Own Risks

    Risk management is important in any enterprise. But when it comes to the financial advisory business, the stakes are higher.
  10. Personal Finance

    3 Key Steps To Take Before You Quit Your Job

    Leaving a job on the best basis means thinking through everything from professional etiquette to what's financially adequate.
  1. Principal-Agent Problem

    The principal-agent problem develops when a principal creates ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Good Student Discount

    An auto insurance policy discount available to young drivers ...
  4. Whartonite

    A graduate of the Wharton School of Business at the University ...
  5. Bidding Ring

    A group of individuals or businesses that conspire to affect ...
  6. Negative Option Deals

    A dubious business practice that involves supplying a typically ...
  1. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  2. Can I use my 401(k) to pay for my college loans?

    If you are over 59.5, or separate from your plan-sponsoring employer after age 55, you are free to use your 401(k) to pay ... Read Full Answer >>
  3. What does passing the Series 6 enable me to do?

    The Series 6, or the Investment Company Products/Variable Contracts Limited Representative, exam is administered by the Financial ... Read Full Answer >>
  4. How do I learn technical skills for trading commodities?

    Many resources are available for those seeking to learn to trade commodities, also known as futures, directly from the major ... Read Full Answer >>
  5. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
  6. What are examples of businesses that exhibit social responsibility?

    In the 21st century, companies that exhibit corporate social responsibility are winning high marks from consumers and investors ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!