Rethinking internship pay regulations: a possible solution to Britain’s social mobility problem?

11 November 2016

Last Friday, MPs prevented the introduction of a ban on unpaid internships. Fears that the proposed reform would “undermine existing employment laws”, raise costs to firms and ultimately decrease the number of internships led to Conservative MPs filibustering the bill. However, increasing access to internships may just be the answer to improving Britain’s low rate of social mobility. The introduction of special regulations for intern remuneration is a policy that could improve mobility while avoiding the adverse effects associated with minimum wages for short-term positions.

Britain’s social mobility problem

There is evidence that children born to poor families in Britain do worse than their peers from other countries with otherwise similar backgrounds. Intergenerational income elasticity – a metric that assesses the extent to which children’s incomes are linked to their parents’ income – is nearly twice as high in Britain as it is in most Nordic countries, for example.

Source: Blanden et. Al (2005)

This is harmful to the economy as it means that the labour market rewards people for their parents’ background, rather than their marketable skills.

Is a ban on unpaid internships the answer?

According to the Milburn report, over one third of graduate vacancies in 2012 were filled by applicants who had already worked for the employer as an undergraduate. Internships are therefore a key entry point to good careers.

However, a large proportion of these positions are inaccessible to people from low income families as 21 to 30 per cent of them are unpaid. The Sutton Trust estimates that the living cost of an intern in London for six months is £6,081; in Manchester, the figure is £5,078. Given that median savings in the country are £1,678, it is unlikely that all graduates can fund their internship alone. Furthermore, a survey by InternAware showed that only 12 per cent of respondents deemed it affordable to complete an unpaid internship.

It is therefore quite likely that most unpaid internships are taken by people from affluent families. Supporting graduates from lower income backgrounds would help them secure better jobs and reduce intergenerational transmission of income.

Nevertheless, banning unpaid internships is unlikely to be the best solution. It could lead to employers, especially smaller firms, ceasing to offer work experience positions whatsoever. If the productivity of interns is below what the minimum wage requires them to be, firms would incur losses by hiring an intern.

A possible solution

The trade-offs associated with the policy are hard to quantify, yet the Government can try a moderate approach. In 2013 France put a two-month cap on the maximum period for which an intern can be hired without remuneration. After the initial two months, employers are required to pay around €550 (£473.40) per month. There is evidence that average wages for business, IT and engineering graduates are above this minimum, meaning that the policy does not significantly interfere with the market.

In 2015 Germany introduced the minimum wage. Interns are entitled to the statutory €8.5 (£7.32) an hour and are only exempt if they are underage, or working for less than three months. Interns with a completed Bachelors or Masters degree are entitled to the minimum wage from the start of their internship.

There are virtually no academic studies of the effects of these policies on social mobility, or on internship supply, as data on these issues is notoriously hard to obtain. Nonetheless, according to Eurostat, the youth unemployment rate in France has remained stable following the introduction of the new regulation, while in Germany it has slightly decreased.

It seems that allowing employers to hire interns without pay only for short periods of time does not lead to labour market anomalies. The policy can help graduates from poor families secure a better employment path through a long-term internship. Introducing special remuneration regulations for interns may reconcile the Government’s commitment to improving social mobility with maintaining a flexible labour market.

Danail Vasilev, Research Assistant, Reform



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