a student choosing between a paid or unpaid internship

Paid vs. Unpaid Internships

More Differences Than Just Pay?

For many students out there, getting an internship before they complete their undergraduate program is a high priority. This is for a good reason. A recent study found that interns both paid and unpaid had a better chance of getting a job offer prior to graduation than their counterparts without any experience in the workplace. However, there's a surprising difference between the successes of paid and unpaid internships. A recent study from the National Association of Colleges and Employers revealed that for unpaid interns, 37% of the time that internship turned into a job offer which is just 1% more often when compared to those who applied without previous experience. Comparing this to paid interns, the results aren't even close. Paid internships were found to have turned into a job offer more than 60% of the time. (Weissmann) The graph below demonstrates just how much of a difference that is. Unfortunately, turning an internship into a job isn't the only problem that unpaid internships struggle with. There are also a number of rippling effects that affect more than just the student undertaking that internship such as the affects it can have on the economy and the labor market.

Student hiring rates based on experience level from a recent NACE study
Job Offers After College

It still isn't entirely clear why students who undertook paid internships found more success in securing a job offer prior to graduation. One theory is that a lot of companies use their paid internship program as an important part of their talent acquisition pipeline. Students who are hired into this sort of company are then already being considered by them for future employment. This would then mean that a lot of unpaid internship programs are just for the labor with no chance of turning that internship into a job offer; many times of which I've seen to not be the case. Furthermore, this doesn't completely explain why unpaid interns are seeing almost no advantage over those who never interned.

One theory could be that brighter students are getting more paid internships. This would seem to be a reasonable factor in the difference, especially considering how much competition there is over the more sought-after internships that pay well like the big tech companies or a private equity firm. Using GPA as a rough qualitative measure of the quality of the student, a study done by Intern Bridge found that the distribution of GPA's found within paid and unpaid internships was practically identical (Townsley et al.). At all levels of GPA, the number of students that had unpaid internships was almost identical to the number of students with paid internships. You can see the results of the study in the graph below.

GPA distribution for paid and unpaid interns sourced from Intern Bridge's internal data

Another aspect of this discrepancy worth looking at is how students of different majors are affected. This is an important factor that's worth exploring because often times the student's major relates to what field they work in and that's certainly something that can determine pay, or lack thereof. It would make sense that a student who goes into a field like finance or tech, which are known for having lots of money flowing around, would have an easier time at finding a paid internship. However, again we are shown that this is not a factor in getting job offers. The chart below shows statistics from seven different majors and the impact it has on job offerings. In almost every case, paid interns enjoyed more success in getting a job offer than those in unpaid positions (Weissmann). Because of this, we can confidently say that the student's major doesn't decide the chances to receive a job offer before graduation and that it really is all affected by whether the position was paid or not.

Student hiring rates based on major from a recent NACE study
History of Internships

The concept of an internship has evolved a lot since the idea first emerged during the medieval times. Back then, a skilled laborer would offer on-the-job training to someone inexperienced in something called an apprenticeship. Based off of this early concept, internships provide students with valuable, hand-on experience that can be of great benefit to their careers. Both paid and unpaid internships are governed at a federal level and some states have additional regulations requiring certain things beyond what's mandated federally. However, unpaid internships have more strict guidelines since the possibility for unfairness and exploitation is much greater.

Unpaid Internships

Recently updated at the beginning of last year, the U.S. Department of Labor's Fair Labor Standards Act (FLSA) outlines what it means to qualify as an unpaid or paid internship. The following list of seven criteria must be met in order to establish that an internship can be unpaid. (Wage and Hour Division) Otherwise the position qualifies as a paid position and the student must be paid at least minimum wage as well as any overtime at an increased pay rate.

The Test for Unpaid Interns and Students
  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern's formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern's academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship's duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern's work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

  8. List taken from Wage and Hour Division Fact Sheet.

These seven tests have been described by courts as the "primary beneficiary test". In an unpaid internship, the primary beneficiary should be the intern. However, there is no single factor that determines this, as shown by the broad and wide range of checks in the list above. Thankfully, the government caught on to some of the exploitative behavior from some employers. These updated checks should outline a more beneficial experience for the intern and gone are the days where unpaid interns are used for free labor.

The Benefits

Up until this point, we've talked a lot about how unpaid internships provide no benefit to finding a job before graduation. While this is true, there's still an incredible amount of good that can come from them that make them very worthwhile.

Employers: Companies can use unpaid internships as a cost-effective way to bring in new talent. They have a practically risk-free way of evaluating prospective employees, allowing them to get a feel for the aptitude of the intern. At the same time, the intern is bringing new ideas and energy which has can have several positive effects on the company. Current full-time employees are now even more motivated to produce consistent and quality work because of concerns that they could be replaced by someone more enthusiastic and eager to perform well.

Interns: The benefits to the student are also great. Interns gain valuable experience not only in their field but also learn a number of priceless professional skills that will serve them no matter where or how they continue their career after the internship. In a classroom setting, the material covered can be very different from how it's actually applied in the workplace. Internships during a student's undergraduate program can give them valuable information that will help them decide where to take their career when the time comes. At the same time, students also have the opportunity to network with students and professionals in their preferred field, and possibly even secure a full-time job before graduation.

Academic Institution: Perhaps not as obvious as the benefits to the intern and employer, there is also much to say about the paybacks the university or college may receive. By encouraging and aiding in the process, academic institutions can keep their courses more relevant and up-to-date due to the experience the past student interns bring into the classroom. Successful internships validate the institution's methods and curriculum, leading to a number of benefits that eventually will come back to them. The result is an improving institution that is more attractive to prospective students because of the reputation to prepare students well for getting a job.

Effects of Unpaid Internships

In recent years, unpaid internships have experienced a massive growth in both the number of them available as well as the number of students doing them. Instead of employers using these internships as a pipeline to bring in new talent, far too often were interns being taken advantage of for their free labor. Its part of the reason the Department of Labor added to their FLSA criterion; to prohibit the exploitative behavior by these kinds of employers. Going back to what we learned about the low rate of job offers for unpaid interns, we can further extrapolate the effect this has. Unpaid interns are rarely seeing benefits outside of gaining experience.

However, it's not as bad for unpaid interns as it might seem. The study published by NACE later revisited their original findings and found that the results were heavily affected by the way their conducted the study ("A Clarification Of NACE Research"). In summary, they confirmed that having a paid internship was positively correlated with receiving a job offer before graduation. What the study doesn't confirm is how different kinds of internship experience effected students after graduation.

Paid Internships

In a legal sense, paid internships are very similar to regular full-time employment. Like the aforementioned, paid interns are to be compensated with at least minimum wage as well as any overtime at an increased pay. As we discovered earlier, paid internship also lead to more job offers prior to graduation than those with unpaid internships and no experience at all. Unfortunately, not every company has the resources available to pay their interns and has no choice but to only offer unpaid internships. In addition to this, many students that want to pursue fields like public or social service, nonprofits, and the arts where finding paid opportunities is far more difficult. Thankfully, many schools are doing something to combat this problem. They want students to be able to follow their passion instead of having to choose a field that pays. Recently, the University of Chicago started a program that allowed two-thousand students to participate in ‘paid' internships (Hartocollis). If the employer couldn't pay, the university would provide a $4,000 grant to the student. This let students pursue whatever field without having to worry about the financial cost of choosing an employer or field that doesn't pay.

My Internship Experience

This past quarter, I did a program at school that is meant to help students earn college credit while interning. Partially why I'm writing about this topic today, I was fortunate enough to have the option to choose between a paid and unpaid internship. Thanks to the help of some incredible people within the program, I had two offers that I was very excited about. I put a lot of thought into making my choice, so for anyone else out there that may be going through something similar I'd just like to offer my experience.

I want to preface this by saying that everyone's situation is different and to acknowledge that I'm in a very fortunate situation that others may not have. I was in a position financially where I could pass up a paid position if I felt the benefits of the unpaid internship would be worth it in the long run.

There's a lot of things that go into a decision like this. Disregarding pay for a moment, there's aspects like work environment, location, hours, and the preferred technologies of that company (for software engineering especially). All these things on their own could be deciding factors, but bringing pay back into the equation, how could you weight all those things against a paycheck, or lack thereof.

The part I thought about the most was future earnings. Looking at the situation in economic terms, it was a simple opportunity cost problem. In microeconomic theory, "the opportunity cost of making a particular choice is the value of the most valuable choice out of those that were not taken. In other words, opportunity will require sacrifices" - definition from Wikipedia. In order to sell myself on giving up a good amount of money now - the sacrifice, I needed to convince myself that the by making that decision, I was setting myself up to be able to earn more in the future; at least enough to cover the amount I missed out by taking the unpaid internship. In the end, this was what helped me make my decision. Both internships were relating to software engineering, but the unpaid one was for machine learning which is a very hot field and in high demand right now. According to an article from Forbes, machine learning engineer was stated as the best job in U.S right now, with job openings growing 344% between 2015 and 2018 (Columbus). The starting salary for the field is also a good amount more than just software engineering. I loved the environments of both and felt that they were both doing very interesting work but knowing this helped me confidently decide to go the route of the unpaid internship, despite missing out on some money short term.

What It All Means

Hopefully after reading all this, you have a better sense on the real differences between paid and unpaid internships. I think what's most important here is that no matter the type of internship, the experience will still pay dividends in the long run. The NACE study that looked at the differences in internships found a common similarity between the successes of all students. The principal findings were that GPA and the total number of internships that a student took part of in their undergraduate career were the two most influential things in determining initial postgraduate success. (Townsley et al.) Students with higher GPAs had much better chances of being employed after graduation compared to those with lower GPAs. The same effect was found with number of internships. Within six months of graduation, those with a greater number of internships were more likely to be employed compared to those who had no internships at that point. From this, the best advice I can give is to just get out there and get involved with as many internships as you can manage. At the same time, staying on top of classes and your GPA. With these two things, you give yourself the best chance of finding a job after college that you'll enjoy.

Works Cited

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