The Stagnation in Household Consumption of Legal Services

A while back I reported on the BEA’s comprehensive revision to its GDP-by-industry accounts that overhauled the data on the legal sector’s output. Unfortunately, the new figures only go back to 1997 and it’s unclear when the BEA will update the data from prior years. Although I seriously doubt the comprehensive revision will significantly alter the pre-1997 numbers—and my arguments that are based on them—it’s an annoyance that the GDP-by-industry data can’t be cited without a caveat.

One thing I did find recently, however, is that the BEA tracks household consumption of legal services, and while the dataset doesn’t cover the entire private legal sector, it does go all the way back to 1959. Household legal sector purchases resemble the legal sector itself before the comprehensive revision: explosive growth in the 1980s, stagnation in the 1990s, a brief peak in the mid-2000s, and then deterioration.

I’ve labeled some noteworthy peak and trough years for real household consumption of legal services and the corresponding levels of total household consumption.

Household Consumption of Legal Services

(Source: BEA NIPA Tables 2.5.x, author’s calculations)

In 2012, households consumed less in private legal services than they did in 1988. If you divide this series on a per capita or per household basis, the true peak was probably 1990.

I believe this tends to support my hypothesis that demand for legal services is income and wealth elastic, and with more households at stagnant or lower income levels, they can’t afford to hire lawyers at a price that can sustain small practices. Nowadays, the current-dollar share of household consumption of legal services to total household consumption expenditures is 0.86 percent. In 1990 it was 1.09 percent. If that ratio had held, then today households would be consuming $119 billion rather than $94 billion in legal services.

The only alternative hypothesis is if since the early 1990s households have been substituting legal services with services from another sector, or if they’ve been executing most routine legal tasks themselves. Either way, unless households begin to consume more legal services, I don’t see any way for the legal sector to recover.

Think about that the next time you hear someone say that now is the best time to apply to law school.

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8 Responses

  1. It’s not going to recover. Unless you’re connected and don’t have to pay for law school yourself, HYS is the only thing even reasonable. And even then I don’t know..

  2. Interestingly, the S. Mimkovic study concerns itself with the period from the upswing in the mid-1990’s through the mid-2000’s plateau, nicely cherrypicking the sector’s zenith to guide his conclusions on the long-term stability and outlook of the profession.

    • They said that the SIPP changed its methodology in the mid-1990s, so they couldn’t use earlier years. This much I believe.

      As to the sector’s zenith, one thing I forgot to point out is that the chart doesn’t tell us about distribution. For all we know, starting in the mid-1990s all the growth was thanks to very wealthy households spending money on a small number of lawyers. It’s great if you’re one of those lawyers, but if not, you might be no better off. It might even mask the decline in smalllaw. Indeed, the price index was rising faster than inflation over this period.

      • I’d peg the growth starting in the mid-90’s on the Lycoses and Pets.comses and Netscapes spending money on a small number of lawyers, but I see what you are getting at. And as the pro-Mimsiekovic folk keep turning their from, one of his first charts – #4, I think – shows stagnant or barely increasing real attorney salaries from the mid 1990’s on at essentially every percentile of income: 10th, 25th, 50th, 75th, and 90th! Meanwhile, what was happening to real law school tuition prices???

      • I think it was figure 1. It was figure 2 where they somehow found NALP employment and salary data going back to the mid-80s, which they misleadingly juxtaposed with the total graduate employment rate. Apparently, starting salaries have fallen to that level, but debt levels have not.

  3. So apparently the typical household from 1960 spends a similar amount of money on legal services as a typical household of today (perhaps a bit more) because there are 52MM households from then and 114MM households today.

    But the typical household of today is spending almost two and a half times as much money on other stuff as the typical household of 1960.

    No wonder the average of practicing lawyers is now 50 !!

    • Exactly. I forgot to mention that on a per capita or per household basis, household spending on legal services has fallen to its 1960s levels.

  4. […] for lawyers is invited to explain what mechanism will bring that about. It certainly won’t be household spending on legal services that’s for […]

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