DISCUSSION PAPER SERIES IZA DP No. 10845 Access to and Returns from Unpaid Graduate Internships Angus Holford JUNE 2017 DISCUSSION PAPER SERIES IZA DP No. 10845 Access to and Returns from Unpaid Graduate Internships Angus Holford ISER, University of Essex and IZA JUNE 2017 Any opinions expressed in this paper are those of the author(s) and not those of IZA. Research published in this series may include views on policy, but IZA takes no institutional policy positions. The IZA research network is committed to the IZA Guiding Principles of Research Integrity. The IZA Institute of Labor Economics is an independent economic research institute that conducts research in labor economics and offers evidence-based policy advice on labor market issues. Supported by the Deutsche Post Foundation, IZA runs the world’s largest network of economists, whose research aims to provide answers to the global labor market challenges of our time. Our key objective is to build bridges between academic research, policymakers and society. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA – Institute of Labor Economics Schaumburg-Lippe-Straße 5–9 Phone: +49-228-3894-0 53113 Bonn, Germany Email: [email protected] www.iza.org IZA DP No. 10845 JUNE 2017 ABSTRACT Access to and Returns from Unpaid Graduate Internships* We use the Destination of Leavers from Higher Education Survey (DLHE) to estimate the socio-economic gradient in access to unpaid internships among English and Welsh graduates six months after completing their first degree, and the return to this internship experience 3 years later in terms of salary, occupation, contract type and career satisfaction. We show a significant salary penalty at 3.5 years after graduation compared with those going straight into paid work or further study, but also that graduates from higher socio- economic status have an advantage in accessing internships while being significantly insulated from their negative effects. JEL Classification: J24, J28, J31 Keywords: higher education, internships, human capital, job satisfaction Corresponding author: Angus Holford Institute for Social and Economic Research University of Essex Wivenhoe Park Colchester, CO4 3SQ United Kingdom E-mail: [email protected] * This work was funded by the Economic and Social Research Council (ESRC) through a ‘1+3’ studentship in Economics [reference number ES/I025499/1] and their Research Centre on Micro-Social Change (MiSoC) [reference number ES/L009153/1]. All errors are my own. This work is based on data from the Higher Education Statistics Agency’s (HESA) Destinations of Leavers Survey and Student Record. This work also uses local labour market statistics and the Index of Multiple Deprivation produced by the Once for National Statistics. The data are crown copyright and reproduced with the permission of the controller of the HMSO and Queens’s Printer for Scotland. The use of the data in this work does not imply the endorsement of any organization in relation to the interpretation or analysis of these data. IZA DP No. 10845 JUNE 2017 NON-TECHNICAL SUMMARY The rising prevalence of unpaid internships as a gateway to highly competitive careers in law, politics, creative industries, media and publishing, and the sciences, has raised concerns about diminishing social mobility, and raised questions about whether and how interns benefit from the experience. In this paper we use the Destination of Leavers from Higher Education (DLHE) survey on graduates from English and Welsh universities between 2005 and 2011, to study the returns to taking an unpaid internship 6 months after graduating from a first degree, on labour market outcomes a further 3 years later. We compare interns with individuals who went straight into paid work, into further study, or something else, by pairing them each one with a ‘matched’ individual, according to their demographic characteristics and their reported motivations for taking the job or internship they are in. We show that, on average, former interns face a salary penalty of approximately £3500 per year compared with those who went straight into paid work, and £1500 compared with those who went into further study. Only compared with those doing ‘something else’ (including travelling or remaining unemployed) do interns gain any significant benefit on average, being 6.4 percentage points more likely to be ‘very satisfied’ with their career. We also analyse access to and returns from unpaid internships by demographic characteristics. We find that there are both advantaged and disadvantaged groups (in terms of expected labour market outcomes after university) who are more likely to be taking an internship. Among the former group are those with parents in professional or managerial jobs, those who went to private schools or ‘elite’ universities, and those graduating with a first or upper second class degree. Among the latter group are Black and ethnic minority graduates, those with disabilities, and from areas with a higher unemployment rate. We also find the negative returns to taking an internship to be significantly smaller for graduates who were privately schooled or with parents in professional occupations. This suggests a segregated market in which the social and financial capital that graduates from higher socio-economic backgrounds can access gives them an advantage in accessing the ‘good’ internships, with a relatively high labour market return. Our results argue for improving access to and reducing the opportunity cost for low SES students of taking relevant experience for ambitious careers during undergraduate degrees, and improving provision of information to students and early graduates about the likelihood of different outcomes from internships in key fields. 1 Introduction The rising prevalence of unpaid internships as a gateway to highly competitive careers in law, politics, creative industries, media and publishing, and the sciences, has raised concerns about diminishing social mobility. This affects the present cohorts of labour market entrants, but the powerful role internships play in determining access to elite or `agenda-setting' professions may contribute to a policy environment or consensus that is still more restrictive for future generations (The Economist, 2014; Sutton Trust, 2014: Panel on Fair Access to the Professions, 2009; Curiale, 2010; Bond and Fournier, 2015, Yamada, 2002). However, despite the growing relevance of unpaid internships to human capital accumulation and job transitions, signalling and screening, and a weight of policy-orientated studies from government, think-tanks and pressure groups (ops. cit.), there has been little work in the economics literature exploring either the private or social returns to unpaid internships. There are several competing mechanisms potentially at play. Firstly, for employers, unpaid internships can act as a screening device, wherein the intern absorbs the cost and risk of being hired while enabling his ability to be observed `on-the-job' (Stiglitz, 1975). For the individual intern the position can signal human capital accumulation (Spence, 1973) and motivation with respect to the specific industry, setting them apart from a field of `lemons' with a common degree class (Akerlof, 1970). Such a `sheepskin effect’ (Trostel and Walker, 2004, for example) of documenting this experience on a CV or R´esum´e(Nunley et al., 2016) should earn a positive private labour market return. In many fields the intern, in common with fixed-term or temporary employees, is also likely genuinely to accumulate human capital, through on-the-job training or observation of industry practices (Try, 2004). It is likely to be those internships for which competition is most intensive. There is evidence that although workers on temporary contracts receive lower wages and job sat- isfaction, and less on-the-job training than those on permanent contracts, temporary contracts do act as a `stepping stone' into permanent employment for university graduates (Bertrand- Cloodt et al., 2012). This makes it reasonable to argue that internship experience, if replacing an unemployment spell after graduation, will improve lifetime labour market outcomes. More- over, conditioning on ability the significant initial wage penalty from a spell of temporary employment (Booth et al., 2002) or internship (Harms, 2015) experience (versus permanent- contract or paid work respectively) is closed within 10 or 5 years respectively. The fast wage 1 growth entailed in the latter result suggests that even if internship experience does not have a signalling or human capital value to employers, it does improve the quality of the subsequent job match. Internships serve to connect graduates to existing professional networks. The ability to call upon referees or to observe other firms’ employment of interns reduces employers' uncertainty about the productivity of prospective employees. This should result in ex-interns benefiting from higher starting salaries, and the wider economy from higher productivity in realized job matches (Simon and Warner, 1992; Nakajima et al, 2010). Internships may also serve to en- hance graduates professional networks, which will improve match quality among graduates and employers later on. However, if the graduate labour market can be characterised as a tournament among graduates, the `micro' benefit of internships