Do Unpaid Internships Make You Worse Off?

This morning, I read a LinkedIn article on unpaid internships, where I saw the following,

First off, it is worth noting that getting a paid internship in college is a very smart idea. The National Association of Colleges and Employers recently did a survey of people who graduated in 2013 with a bachelor’s degree and found that a graduate who did a paid internship while in college made an average starting salary of $51,930 – compared to a $37,087 average salary for workers who didn’t do an internship.

But here’s a shocking statistic from that same survey: 2013 graduates who did an unpaid internship while in college actually made less than students who got no internship at all – $35,721 a year, on average, compared to the aforementioned $37,087. Pretty bad deal – work for free and then make $1,366 a year less when it’s time to work for money.

There’s something wrong with that interpretation.

Let’s consider a single representative of a recent graduate. She has three options available to her, ordered from best to worst:

  1. Take a paid internship and later land a $51,930 salary
  2. Skip the internship and go straight for a full-time job with a $37,087 salary
  3. Take an unpaid internship and later take a job with a $35,721 salary

What determines which option she’ll take? Obviously, all recent graduates will want (1), but not all recent graduates will get that opportunity. Only the best will. Let’s say our graduate isn’t in that tier. She can opt for (2), but after we eliminate all those who achieved (1) we still have to choose the best of what remains to fill the limited number of full-time jobs available. That’s a second tier of candidates. Let’s say our representative doesn’t fit that category either. So, without options (1) and (2), the only thing she can do is (3).

What the author of this article wants to do is eliminate option (3), so that the only thing our candidate can do is be unemployed and hope that some time soon she’ll be able to fit into (1) or (2).

In any case, notice his wording. He’s saying that taking an unpaid internship leaves you worse off than choosing to work without that internship experience. That’s misleading, because to a lot of people who choose option (3), option (2) was never really a choice they weren’t sufficiently qualified. Option (3) leaves you better off, however, than not having a job at all!

A much more direct, if a bit more crass, way of putting my point is, those differences in incomes might represent differences in the skills different candidates have to offer. If someone takes an unpaid internship and over the long-run ends up making an average salary of $35,721, maybe it’s because they couldn’t compete against those other candidates who ended up getting jobs directly out of college or a paid internship.

So, it’s not that they’re getting bamboozled by employers. It’s that the unpaid internship was really their best choice, because (1) and (2) were really never on the table for them.

Kirzner, Mises, the Entrepreneur, and the Market Process

Daniel Kuehn has a string of interesting posts on Israel Kirzner and they have pulled me from my slumber.1 I want to defend Kirzner, but at the same time I agree with Daniel that maybe Austrians have ignored “mainstream” contributions to market process economics. While I can’t claim to be superbly well read on Kirzner, I do feel comfortable making the claim that maybe Kirzner’s (main) contribution was much more narrow than many Austrians suspect the entrepreneur’s role in the market process, rather than the market process in general.

First things first, I suspect one of the following happened: (a) Daniel misunderstood Kirzner; (b) Kirzner did not communicate his argument well. (I’ve already commented on this on Daniel’s blog, but hopefully he won’t mind if I repeat myself here.) Daniel claims that Kirzner made an elementary mistake is confusing value for prices. If that’s true, I agree with Daniel. But, then I think that Kirzner articulated his point poorly.

If I interpreted Competition and Entrepreneurship correctly, Kirzner cares about prices not values. Specifically, and following Mises, he argues that the entrepreneur’s role is to notice disequilibria between factor and final good markets. To illustrate this line of reasoning in terms of equilibrium, suppose that the final goods market is producing at qc(uantity) < qc*, and let’s assume that this implies that the the price for factors of production is pf < pf*, such that if the entrepreneur buys at pf he’ll be able to sell at a price that corresponds to qc*, but at a cost that corresponds to qc. Kirzner is explaining pure profits, not surplus value.

It is, I think, more-or-less the same point that Frank Knight makes in “Profit and Entrepreneurial Functions,”

In the theory of competition, all adjustments “tend” to be made correctly, through the correction of errors on the basis of experience, and pure profit accordingly tends to be temporary. While it exists, in a positive form, it may obviously be regarded as a phenomenon of monopoly, and some distinction, which can never be clear, must be made between temporary profit and permanent monopoly revenue.

— p. 128.

(Kirzner, however, would disagree with the notion that profits are a monopoly phenomenon.)

What of the claim that the “mainstream” ignores the market process? I can’t agree with this argument, because I think there is a large “mainstream” literature out there that talks exactly about the market process, although perhaps not in a way that Austrians can readily identify. In fact, I think that there are several theories out there which go beyond Kirzner and, actually, explore many areas that Kirzner maybe didn’t recognize.

Consider the debate between Ludwig Lachmann and Kirzner. Both agreed that there are equilibrium and disequilibrium “forces” at work; they disagreed on what the net outcome has to be. Kirzner believed that markets ultimately equilibrate, while Lachmann held the much more ambiguous position that we can’t know for certain, at least in an a priori sense. Doesn’t the literature on job market search frictions and monopsonistically competitive labor markets prove Lachmann right? Things like employee loyalty to their firm, or imperfect knowledge of labor markets, other forms of transaction costs (e.g. transportation costs), suggest that maybe there comes a point where markets won’t equilibrate further (given a set of institutions). Finally, don’t these results contribute to our understanding of the market process?

Speaking of institutions, doesn’t Akerlof’s “Market for Lemons” paper, when properly interpreted, give us quite a bit of insight on the market process and institutional change? Coming back to the Lachmann-Kirzner debate, Akerlof’s insight actually seems to back Kirzner if markets don’t equilibrate [the way we want them to] under one set of institutions, we’ll develop new institutions to get them there. Moreover, to posit that agents will introduce new rules (e.g. reputation, guarantees, et cetera) seems to implicitly assume that there are agents willing to capitalize on new profit opportunities.

Likewise, I interpret New Trade Theory as belonging to the study of the market process. Paul Krugman, and others, provided insight on how markets respond to changes in population size and, more fundamentally, how markets can form at all, if we assume that there are no comparative advantages at t0. This is a dynamic theory at heart, so it must say something about the market process (something that many Austrians have been quick to dismiss). Perhaps New Trade Theory has a more narrow focus than, say, Mises’ discussion of profit and loss, but that doesn’t mean that it doesn’t offer any process theory insight at all.

Sure, maybe these theories are framed in terms of equilibrium not unlike Kirzner’s theory, mind you , but they’re suggestive of the fact that maybe the “mainstream” thinks more about the market process than Austrians give them credit for. So, in this regard, I completely agree with Daniel. In fact, I could go as far as to claim that, rather than Austrian contributions being underestimated by the “mainstream,” perhaps the Austrians have underestimated “mainstream” contributions. Or, maybe there’s a little bit of both going on.

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1. This site has been loading very slowly. The servers I contract through aren’t working out, but hopefully I’ll be able to move the site to new servers soon.

Blogging Without Social Media

Anyone who has a successful blog knows that they have to market their content through social media, because otherwise potential readers aren’t going to find them. When I started Economic Thought, I didn’t expect people to find me through Google or some other search engine. Instead, I went out and advertised by linking to my posts on Facebook, Twitter, and what have you.

There are companies out there who want to tell you that blogging once a month no social media presence necessary (and no alternative advertisement methods) will help keep your local search rankings up, just because Google prizes “fresh content.”

I’ve been keeping data these past months, and my results show that Google couldn’t care less about these intermittent blogs with no social media outreach:

No blog effect 2

Yet, there are plenty of business owners spending money on intermittent blogging.

Google, Hayek, and the Future of Search Engine Optimization

I’ve been working on a website’s SEO (search engine optimization) this past week, in an attempt to push it back up to the first page of a local Google search. Even though I’m only about fourteen percent complete with the project, I did manage to get it on the first page of a Boston, MA search for “cosmetic dentist.” Cool story, right? Anyways, look at the image of the search below and notice which terms Google highlights:

Keyterms are becoming progressively less important in SEO.

Google related “cosmetic dentist” with “implant dentistry.” It does this by grouping certain terms together into categories and using these categories to help the algorithm provide more comprehensive, more precise search results. This represents progress in search engines’ ultimate objective of being better able to interpret complex sentences, or natural language processing. Google, in particular, has developed such a complex algorithm that keyword optimizing — at one point, SEO 101 — is becoming less and less important. I’m sure there are many, many people who have caught on to this, but still many haven’t. Based on my experience, I’m willing to bet that most content marketing firms are using antiquated SEO techniques. In part, it might be because it’s still not entirely clear what Google is doing. This is where Hayek comes in. Continue reading “Google, Hayek, and the Future of Search Engine Optimization” »

Quote of the Week

This paragraph is huge, so for the sake of making it easier to read I’m breaking it down (and the paragraph continues beyond the point the excerpt below ends):

What we perceive are never unique properties of individual objects, but always only properties which the objects have in common with other objects. Perception is thus always an interpretation, the placing of something into one or several classes of objects. The characteristic attributes of sensory qualities, or the classes into which different events are placed in the process of perception, are not attributes which are possessed by these events and which are in some manner ‘communicated’ to the mind; they consist entirely in the ‘differentiating’ responses of the organism by which the qualitative classification or order of these events is created; and it is contended that this classification is based on the connexions created in the nervous system by past ‘linkages.’

The qualities which we attribute to the experienced objects are, strictly speaking, not properties of objects at all, but a set of relations by which our nervous system classifies them. To put it differently, all we know about the world is of the nature of theories and all ‘experience’ can do is to change these theories. All sensory perception is necessarily ‘abstract’ in that it always selects certain aspects or features of a given situation. Every sensation, even the ‘purest,’ must therefore be regarded as an interpretation of an event in the light of the past experience of the individual or the species.

— Heinrich Klüver, “Introduction,” in F.A. Hayek, The Sensory Order (University of Chicago Press: Chicago, 1976 [1952]), pp. xviii–xix.

Before You Hate, Read it For Yourself

Might seem excessive to blog about this, but it’s a meme that has to stop.

The Intercollegiate Review has a list of the 50 worst books of the 20th century. This was too predictable:

John Maynard Keynes, The General Theory of Employment, Interest, and Money (1936)

This book did for Big Government what Rachel Carson’s Silent Spring did for the tse-tse fly.

1. The blurb is stupid and false.

2. Just because a book says something you disagree with doesn’t make it a bad book. Whenever someone tells you not to read a book because the content is disagreeable you should take it as a hint to do the exact opposite and read it.

Other entries include Karl Popper and John Rawls. Try telling an academic political philosopher that Rawls’ A Theory of Justice is one of the worst (non-fiction) books of the 20th century. It’s too bad people read and believe the misinformed trash these publications put out.