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Are Unpaid Internships an Example of Market Failure?

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It's that time of year again. The days are starting to get shorter, the weather is getting colder (sort of) and the mad rush to secure a graduate job is looming for every final year university student or perhaps even school leaver in the country. However, the mad rush for work experience highlights the inequality of opportunity that most graduates face as demand for work is far exceeding supply.

The number of young people attending university has risen dramatically and as a result, more and more graduates are competing for the same jobs. Due to the increased competition, students are turning to work experience and internships to make them stand out and in some sectors, internships have become unofficially compulsory for career advancement.

This puts employers in the position that if one student cannot or will not be unpaid then there are plenty more that will. This prices people from poorer backgrounds out of the market because they do not have the financial means to compete; perpetuating the cycle of inequality.

This is where Market Failure comes in. Paid internships are what economists call 'merit goods' -- which means they benefit society as whole as well as the individual but if the market is left to its own devices they tend to be under consumed. Market Failure occurs when there is a societal cost incurred by the fluctuations of the market; in this case, the failure of the market to provide paying internships has led to a generation of young people being unable to move up the social ladder.

So what can be done about this? The traditional center-left argument is that governments should intervene to avoid market failure. The counter argument to intervention was put forward by Julia Margo, Deputy Director of think-tank Demos that if businesses had to pay they couldn't afford to provide these sorts of opportunities, leaving young people with absolutely no route to gaining experience. However, although this is unfortunately true in the practical sense, this does not make it acceptable to have a society where inequality is ingrained into our economic system. Her argument attempts to legitimize Market Failure rather than solve it.

If we have limited resources shouldn't we therefore give them to the talented rather than the lucky few? The clash between practicality and ideology seems impossible to solve but if we don't take action now the rot will set in. The Chartered Institute of Personal Development have offered a compromise with an 'apprenticeship wage' of £2.60 an hour for some placements.

Although this is probably the most practical solution that has been suggested so far, is it really fair to expect graduates to work for less than half what their low skilled counterparts receive? Will this mean that more young people will decide university is not worth it after all?

Unlike some of the campaign groups who believe all work experience and internships should be paid I do not think this is a practical solution. However any placement that lasts longer than a week or two should pay expenses. Furthermore, week-long work placements in particular, have to be able to prove that they are instructive rather than just exploitative. I have done work experience were I have been treated as unpaid staff member and work experience where I've actually felt I've been taught something.

The myth that markets are self-regulating is dead. In theory, the market can only be truly efficient if its left to its own devices but in practice, the quest for lower fiscal costs all too frequently creates a much larger social cost. With the uproar over bankers' bonuses more criticism has been played on how much they earn. The justification for this is that they need to pay the best wages to attract the best people; why does this not apply to interns as well?