The Bizarre Consequences of Standard Economic Logic (Unpaid Internships Edition)

Harvard economist Edward Glaeser has decided that the solution to problems of inequity in unpaid internships is to expand student loans to cover unpaid internships. Now, to anyone not trained in economic logic, that probably sounds a little crazy. Student loan debt is over 1 trillion dollars, the job market is bleak, and the solution is to take on more debt? The basic economic logic is that as long as everyone has access to capital markets (i.e. can take out a loan) they will be able to correctly assess the future earnings value of internships and will take out loans only if it is advantageous to do so. This is wrong on so many levels that I had trouble deciding where to start.

First, there seems to be a tendency in economics to associate equality of opportunity with equal access to capital markets. In class, I once pointed out that being willing to spend money to get an MBA was a function of the initial wealth of the student (or student’s family). The professor waived off this objection by stipulating that we were assuming equal access to capital markets. Similarly, Glaeser is trying to make that assumption true by giving poorer students access to loans. The problem is that the willingness to take out a loan still depends on a host of other factors, both the economic factors like initial wealth, and the cultural factors that determine how much risk one is willing to take and whether or not one sees value in education by unpaid internship.

Economists really want the amount you’re willing to pay for something to reflect the amount you value it. But, unfortunately for them, willingness to pay is a combination of one’s value of the good/service and one’s ability to pay. Let’s say an art history graduate student is at an art auction bidding against Bill Gates. Gates winning the piece of art doesn’t tell us anything about which of them values the piece more, because Gates could spend more than the art history grad student’s career earnings and barely notice it. In this (admittedly extreme) example ability to pay dominates over the value each one places on the artwork. In other examples the two component parts (ability to pay and value of the good/service) will interact in less obvious ways, so unless we have people with exactly equal wealth,  income, and future earning prospects it will be nearly impossible to tell who actually values a good/service more.

Second, how on earth is one supposed to determine the value of an unpaid internship? Glaeser’s plan actually calls for the government to partially determine this ahead of time and only offer loans to those that have value. In doing so, he seems to accept that humans have limited access to information (an assumption you might think would be standard in economics, but isn’t) and that governments will be able to use tracking to determine which unpaid internships actually lead to jobs. This is better than no information, but it still makes it unclear how one determines how much of a loan is worth taking out in order to work an internship.

Third, while some unpaid internships might have value, on net they don’t seem to increase employment. (Note: the study only covers college students).  Perhaps this means that none would receive official certification under Glaeser’s scheme…but if you believe that, why not just scrap unpaid internships altogether?

Fourth, focusing on internships tends to imply that developing skills will fix our ailing labor market. While in the long-run developing skills is nearly always a good thing, this isn’t currently the biggest problem facing our economy. As Adam Davidson writes in the NY Times: 

The secret behind this skills gap is that it’s not a skills gap at all. I spoke to several other factory managers who also confessed that they had a hard time recruiting in-demand workers for $10-an-hour jobs. “It’s hard not to break out laughing,” says Mark Price, a labor economist at the Keystone Research Center, referring to manufacturers complaining about the shortage of skilled workers. “If there’s a skill shortage, there has to be rises in wages,” he says. “It’s basic economics.” After all, according to supply and demand, a shortage of workers with valuable skills should push wages up. Yet according to the Bureau of Labor Statistics, the number of skilled jobs has fallen and so have their wages.

Unpaid internships remain a bad idea, but the larger point here is that access to capital markets doesn’t fix problems of inequality. In a world of perfect information in which completely rational actors could game out inter-temporal optimizations problems and then determine how much debt they should take on in order to maximize their lifetime utility, perhaps access to capital markets would fix equality problems. But that world is nothing like this world. It’s time to stop designing economic structures for Vulcans and start designing them for humans.

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