Internships are slowly becoming the only realistic entry to many white-collar careers for graduates fresh out of uni. Banks and accountancy firms now hire more than half of their graduate employees through their internship programmes; careers in politics, consultancy, the media and many other fields almost always start with one nowadays. 66 per cent of American students do at least one internship before they leave college. But they are often poorly compensated: nearly 50 per cent of the internships in America are unpaid. Although such statistics for Britain are at best guesstimates, the situation is most probably not very different.

How do unpaid internships exist in countries that have minimum-wage laws, such as Britain? The job market continues to struggle and new university graduates are challenged to find employment related to their fields. On the surface, unpaid internships benefit both employer and employee. The employer could evaluate potential new hires without paying them, and the intern could master new skills, gain experience for their CV and, potentially, a chance for a real job. 

Economic commentators, however, are uneasy about the downsides of these unpaid positions. Their concern is that young workers desperate to launch their careers take the risk of being exploited without being guaranteed any tangible benefits. A more subtle yet equally concerning impact is the effect the practice is having on the job market, by crowding out paid jobs and tempting firms to use “dispensable” and easy-to-find unpaid interns. 

It is mandated by the law that British interns at profit-making firms must be paid the minimum wage unless the internship constitutes a part of their degree course or they are doing short-term ‘shadowing’. Italy and Spain have recently introduced specific minimum wages for intern. Firms which do not pay their interns increasingly take the risk of being prosecuted. Fox Searchlight, a film distributor, recently lost a case against two former unpaid interns who had worked on the film Black Swan.

In America, the main legal requirements for an unpaid internship are that the intern receives training, must not be hired in place of a paid worker, and must have a guaranteed job offer after the end of the internship. Also, the employer must not receive any immediate benefit from the internship. The last requirement is ambiguous, and it is possible for employers to wriggle out of it. What makes illegal unpaid internships particularly difficult to detect is the fact that firms will only be investigated if someone makes a complaint against them. Interns are unlikely to report their employers' violations for fear of damaging future opportunities. 

The benefits of an unpaid internship to a business are pretty clear. Employers almost certainly derive benefit from unpaid labor. An intern usually must perform some duties, work on projects and actively contribute to the daily work of their team to be able to demonstrate they are learning. An internship programme can also be perceived as a ‘lobster tank’, from which employers can observe interns in the work environment and choose the best people to offer paid employment to. It improves the quality of new hires and decreases the number of potential labour law disputes in the future. Another benefit for employers is that interns who are eventually hired by the company require less paid training. 

Supporters of unpaid internship programmes also outline the benefits of internship schemes to new graduates. In order to secure a job in many industries, it has almost become the accepted practice to work unpaid first. A greater number of graduates are competing for fewer jobs and have more education debt. An internship offers relevant experience that gives graduates a better chance of working in their preferred industries. 

The increase in the number of unpaid internship positions may be bad for salaries in industries for which they have become part of the standard hiring process. For interns, this may be a valuable chance to make an early impression and forge connections, allowing them to advance more quickly in their areas. Overall, however, unpaid jobs might be displacing paid roles, reducing the total number of entry-level jobs in the industry. This leads to a vicious circle of fewer jobs and more job seekers willing to work for free.

Which industries offer the easiest entry to work experience? And which industries retain the largest proportion of their interns? LinkedIn analysed the profiles of its 313 million users to track internship and hiring patterns. Software firms, for example, have only a few openings but retain around 40 per cent of their interns, which is more than most other sectors. However, public-relations firms tend to hire three times more interns than permanent employees annually, but 27 per cent of interns receive a job offer at the end of their placement. For those seeking the security of a permanent job, accounting, management consulting and the public sector offer decent intern retention rates between 40 per cent and 60 per cent. However, securing an internship in the first place in those sectors only happens through an extremely competitive process. Charities, NGOs, and small business are far less likely to retain their interns, although getting an internship there might be a little less competitive. 

In highly competitive sectors where unpaid positions are almost a must-have CV asset, interns are likely come from better-off families. The reason is straightforward: you must be able to afford to work for free. Students that pay their own living expenses usually cannot afford to do so and have to look away from unpaid internships and take up paid work often unrelated to what they have studied. The long-term impact on employers is that they will lose access to the best available talent on the market, which is bad for productivity and the economy. On the other hand, students who live at home for free or come from wealthy families are spared living expenses while working for free. 

Although it does not look like unpaid internships are going away anytime soon, concerns about the assumed exploitative nature of the practice are likely continue. University graduates must weigh all the pros and cons to determine whether an unpaid internship is right for them. Employers must learn to look beyond the immediate boost of unpaid work to their balance sheet and consider the wider applications for their ability to attract the right talent in the long term. As in any other context, those who buy cheap end up buying twice.