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Intern Nation

From record-low unemployment to a loss of 6 million jobs since the start of the recession, the U.S. labor market is hemorrhaging. Ironically, in this climate of unprecedented mass layoffs with expectations of more, American workers are better educated than ever. And yet increasing numbers face a stark reality: nonwage work.

Secretary/Intern
Secretary/Intern

With revenue-challenged employers, fewer opportunities, and even less demand, postgraduates and laid-off, mid-career professionals from Boston to Silicon Valley are hardly loafing. They conduct surveys, develop products, strategize funding, manage books, and spearhead social media branding-for free.

Welcome to Intern Nation, where postgrads pay $9,000 to work for free and serial interns build their skills in back-to-back unpaid gigs so they can one day secure a paid position with low wages that may take them years to remedy. It's a world where interns replace employees who go on maternity leave, fill in for an entire staff of let-go workers, and represent brands online in "intern jobs."

In this no-loss, maybe-gain landscape, out-of-work product developers and strategic planners armed with MBAs and engineering degrees bide their time at startups that may never receive funding. Last month, unemployed fortysomethings stood alongside millennials at an unpaid-job fair hosted by JobNob with about 300 attendees, including a past CFO, hoping for a match with one of 50 startups in need of bodies. Even ex-Wall Streeters settle for the big zero. Lawyers do, too.

Before Bust 2.0, working for free was as appealing as eating pork during a swine flu outbreak. Newly minted Ivy League graduates lined up for paid internships and got top jobs in finance, consulting, marketing, and other industries. MBAs headed from salaried summers to top jobs with hardly a ripple, and experienced workers made lateral moves as salaries rose or remained steady. Now, thanks to the economic downturn, some job seekers say they are lucky to land an unpaid position at a small company or startup where they can leverage skills while keeping a toe in the job market.

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The U.S. Department of Labor measures unpaid work as 15 hours or more of weekly labor on farms or in family businesses. But that classification doesn't tell the whole story. With the ever-narrowing pipeline of paying spots, there's still a lot of other unpaid work out there. Is it still work when it's done for free? What is its value beyond being an excuse to leave the house dressed in business casual? How long should it take to reap monetary rewards? Is it bad for one's reputation, and if someone is willing to take unpaid work, does it demean him? Or is unpaid work just another manifestation of "free is the future of business"?

Non-paid work the "next big thing"

Economists say there is value in unpaid work but that wage-free labor is more costly for those with higher consumption commitments. "The fact that the wage is zero doesn't mean that compensation is zero. Usually, you gain something," said Columbia professor of economics Till von Wachter, referring to training, experience, and contacts. "The downside is that workers need to finance their living somehow."

According to the National Association of College Employers, whose members mostly include large firms that recruit on campus, there are 22 percent fewer paid internships and 21 percent fewer full-time hires for 2009 graduates. NACE also reports that students who previously sought full-time paid positions are seeking internships instead. For these new graduates, competing for the big zero isn't easy, and site likes One Day, One Internship help postgrads navigate the choppy waters. One Bowdoin graduate, who claims unpaid internships are "the next big thing," laments that she "can't seem to get one."

University of California-Berkeley graduate Jonathan Hung endured an internship at a social media startup in San Francisco before volunteering his Web developer skills at a children's hospital. He was hired a month later. "Being unpaid sets up this psychological barrier from the get-go," he said. "It's not all about the money, but honestly it is. What's the motivation?"

The economic crisis has business schools scramblingto help students find opportunities. Aaron Gray, a 2009 Harvard Business School graduate who worked for Fandango and VC firm Greycroft Partners, is an unpaid consultant for startups Gazelle and TokBox while he looks for full-time, paying work. "I am helping them figure out how to make money or add value through their business models," he said.

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Value is a word that echoes through the chambers of U.S. business, and its meaning—along with the meaning of work—is changing. In Silicon Valley, short-term business models, such as iPhone and Facebook applications, are increasingly commonplace. As a result, experts say, VC firms often make smaller, quicker investments. Companies that previously would have received $500,000 in seed funding and an additional $500,000 in Series A funding are now on their own until they boast revenue.

More and more, investor groups like Sand Hill Angels hunt in packs, requiring companies to jump through the requisite due-diligence hoops, according to Debby Hindus, an alumna of MIT's Media Lab and Paul Allen's Interval Research. Hindus describes it as a funding compression that mirrors the salary compression. "This model favors companies with a certain kind of risk profile, companies that are a lot further along than those we used to associate with angel funding," said Hindus, who advises—yes, for free—companies that are looking for funding.

The new meaning of "value"

Start-ups are at a disadvantage, have fewer resources, and end up recruiting through friends and contacts or at unpaid job fairs. Once recruited, these highly skilled professionals slave away on projects, sometimes for years, with no financial reward and maybe go out and start companies on their own—or, if they are fortunate, get equity, the golden ticket. "That describes most entrepreneurs that I know but also most college students," said Elon Musk, chairman of Tesla Motors in San Carlos, Calif.

And yet, this mind-set doesn't take into account stringent state and federal wage laws and the effect of free labor on productivity (among other downsides). Princeton labor economist Henry Farber, who said unpaid work is "relatively uncommon," is skeptical that there is an increase, since those who work for free either fall into the "actively seeking work" category of federal employment surveys or have given up looking altogether and are counted as being out of the labor force.

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Farber indulged the thesis nonetheless: "Most companies would turn down offers of free labor because they can't run a reasonable human-resources operation if some people are free." He continued: "I don't want to fly in an airplane where half the cockpit is paid well and half isn't." While unionized commercial pilots are neither postgraduates nor out-of-work professionals, and while labor economics is intrinsically complicated, Farber makes a salient point.

In certain situations, though, free labor works. As Palo Alto-based entrepreneur and Stanford University graduate Ashvin Kumar of Greet Beatz, a digital gift-giving startup, puts it: "The way to look at it is, ‘What kind of value are you adding and what kind are they adding?' If the company is providing an opportunity that you otherwise wouldn't have had, then they have incentive to not pay you. If you're providing value to the company that the company doesn't have, then they need to pay you."

The gift economy, which places value on social connections, has long been a fixture in creative circles. While its inroads into market-only zones certainly aren't new, it is gaining prominence, driven largely by new technologies and thanks to giants like Google and others that have helped launched the "freeconomics" movement. In his forthcoming book, Free: The Future of a Radical Price, Chris Anderson explains that by giving away widgets, a demand is created. The result? Businesses profit more by offering free products and services than if they charge. The idea can be applied to labor, too, and that's likely why workers, even at the highly skilled level, give away their talents.

They get more working for free than not working at all.