NALP’s Fuzzy Definition of ‘JD Advantage’…

…Is largely the same as the ABA’s, but that’s not the point, which is that you should read:

NALP’s Fuzzy Definition of ‘JD Advantage’

on The American Lawyer. It’s probably the first time I’ve written on this curious topic.

I don’t have any music for you as I’m beating a virus today that’s hampering my productivity. Since my organs haven’t liquified yet, I’m ruling out Ebola.

Peace.

How I Learned to Stop Worrying and Love the ‘JD Advantage’ Category

…Pretty much sums up my response to the National Association for Law Placement’s analysis of the class of 2013’s employment outcomes.

Quoth Executive Director James Leipold:

As the legal services market continues to change at a rapid pace following the dramatic downsizing during the recession, the variety and diversity of jobs that law grads take now is greater than ever. In general, the picture that emerges is one of slow growth, and growth that is a blend of continued shrinkage and downsizing in some areas offset by growth in other areas.

Although the NALP changed its terminology from “JD Preferred” to “JD Advantage” starting with the class of 2011, this year marks the record percentage of JD Advantage jobs.

Percent Employed by Status (NALP)

The good news is that the percent not working (aka the unemployment rate) has fallen to 12.9 percent. The record was 14.6 percent in 1993. I’m confident that record will not be breached, so there’s some good news. Indeed, I think it’s disturbing that the early ’90s recession mauled law practice so badly.

As for the JD Advantageers (seriously, slap a jetpack on them and shoot them into the sky), though, I did a quick correlation analysis for the 2001-2013 period. JD Advantage has a surprising -0.94 correlation with Bar Passage Required and an unfortunate 0.85 correlation with Not Working. This bodes ill for the merits of JD Advantage generally.

As for the correlation between JD Advantage and employer types, again, private practice correlates at -0.94. (Wow.) Business and Industry weighs in at 0.97, but Public Interest comes in at 0.91, which is either good or means that Public Interest has been watered down with people who couldn’t find work in firms.

(I forgot to mention that Business and Industry hit a record 18.4 percent of employer types this year.)

So yeah, strong positive correlations with unemployment is usually something you don’t want when making sense of employment categories. Thus, when Leipold says that the picture is one of “slow growth that is a blend of continued shrinkage and downsizing in some areas offset by growth in other areas,” I caution against seeing growing proportions of JD Advantage outcomes as plausibly representing a positive future for law school graduates.

Leipold, lamentably, disagrees:

It is not true that there are too many lawyers — indeed even today most Americans do not have adequate access to affordable legal services — but the traditional market for large numbers of law graduates by large law firms seeking equity-track new associates is not likely to ever return to what it was in 2006 or 2007, and thus aggregate earning opportunities for the class as a whole are not likely to return to what they were before the recession.

Not too many lawyers? Tell that to the JD Advantage cadre.

Site Update: Lawyer Overproduction Page

You can find it here or in the “original research (updated)” menu above. It’s long overdue as I’ve received requests for its sources.

I also delisted the “law schools and law students per capita” page. It hadn’t been updated in around three years, and the lawyer overproduction page pretty much supersedes it. It’s a little sad because that was the first research project I started on this blog back in the summer of ’10. Maybe I’ll come up with a reason to put it back into the mix, but not now.

On the Am Law Daily: ‘ABA Task Force Report: Part Good, Part Baffling’

You can find my latest Am Law Daily article here:

ABA Task Force Report: Part Good, Part Baffling

Per the discussion on my first cut at the topic, I added a little bit more on the possibility of limited-licensing programs reducing costs. There’re other changes to the original post.

http://www.americanlawyer.com/home/id=1202643728147/ABA+Task+Force+Report+Part+Good+Part+Baffling%3Fmcode=1202617075486&curindex=3

Why the Stagnant Labor Productivity in the Legal Sector?

In my last Am Law Daily article, I discovered that contrary to all expectations, the quantity of private legal services provided per hour worked has stagnated for more than two decades. I think this is one of the most important insights I’ve come across, and I think the macroeconomic data on the legal sector is greatly undervalued in commentary on the future of law and law school. The lack of productivity increases certainly deserves a bit more discussion than I gave it in the article.

Legal Sector Labor Productivity

(Sources: BLS multifactor productivity tables, BEA, author’s calculations)

So, were lawyers (okay, legal sector workers, but I may use the term interchangeably) more efficient when they used paper reporters than LexisNexis?

Unlikely. I think there are other things going on here.

One, (private) legal services aren’t homogeneous outputs. An hour spent on a criminal defense matter isn’t the same as an hour spent on a landlord-tenant dispute or a corporate merger. It’s possible that many lawyers (and firms) have become more productive over the years, but the composition of the average hour of legal services Americans are buying has changed.

All this observation does, though, is raise the question of how the average hour has changed, and there isn’t much direct evidence on the subject. There are some indirect data. For example, American Bar Foundation (PDF) statistics show that since 1980, large firms have crowded-out smaller ones, though curiously solo practitioners are about as abundant as they ever were.

Percent Private Practice Lawyers by Firm Size

In 1980, only 7 percent of all private practice lawyers worked in a firm larger than 50 lawyers; in 2005, 20 percent did. But this doesn’t show much because in most circumstances we expect larger firms to be more efficient than smaller ones, so they’d cost less per client. On the other hand, Bill Henderson tells us that the employment composition of biglaw has changed since the 1980s as well, which I think can support the idea that the average hour of legal services has changed.

We also know that in general legal services have become more expensive over the years, even as the number of employed lawyers has grown. Legal services cost twice as much on average in 2011 as they did in 1985 in real terms.

Real Legal Sector Price Index

(Source: BEA, author’s calculations)

So how do you square the circle of more lawyers yet costlier legal services? In two ways: First, you can argue that demand for legal services is wealth and income elastic, i.e. the more money one has, the more they like spending it on lawyers and they buy different kinds of legal services too. And wouldn’t you know it, just this morning The National Law Journal reported that $1,000 per hour billable rates for “in-demand partners at the most prestigious firms” aren’t rare anymore. Second, you can argue that as Americans’ incomes and wealth decline, they’re unable to purchase the legal services that they used to, and the lawyers who formerly served them either move to a higher-priced market or go out of business.

The only alternative you’re left with is that there’s an attorney shortage, and all those “excess” law school graduates are really just lazy, greedy, entitled, and unwilling to make the tough sacrifices like abandoning their current lives and moving to rural America to serve the poor. However, this argument requires throwing out rational behavior assumptions and leads us to wonder why the supposedly efficient large firms won’t serve the poor if the greedy grads will not. The “market failure” line is ever wanting for an explanation.

If the composition of the average hour of legal services hasn’t changed, then the only way I can think of where we get the same (or less) output for the same effort despite technological advances and rising prices is by systemic fraud and cartelized behavior on a spectacular scale. Lawyers lie in lockstep about the cost of their services. Then they work fewer hours a week and take Fridays off. New lawyers attempting to enter the market, work more, and charge lower prices face threats and sabotage.

I’m sure plenty of people believe the above is true, but there’s scant evidence of it.

********************

So we have stagnant legal sector labor productivity. I think it reflects wealth concentration rather than fraud.

Incidentally, clever observers might wonder how much it matters. Maybe increases in overall labor productivity have a long way to go to catch up to the legal sector’s, an observation that didn’t make the cut in my Am Law Daily piece. Indeed, most productivity gains over the last few decades have not gone to workers. Here’s a different measure, output per worker (instead of per hour, which is more precise).

Real Value Added Per Person Engaged in Production

(Source: BEA, author’s calculations)

By this measure, the legal sector has become 13.5 percent less productive between 2009 and 2011. This could mean that either all lawyers who didn’t lose their jobs in the Lesser Depression organized a work slowdown, or the Lesser Depression laid-off the most productive legal sector workers. In a variant of the latter, some practice areas might be more productive than others—especially those benefitting poorer clients and not the wealthy—and once poor people become destitute, an otherwise productive chunk of the legal sector goes out of business. Regardless, there may be significant deadweight workers in the legal sector.

What does this mean for the as-yet unmentioned prospective law student? As I wrote in the article, law will only consistently pay off for those who can serve the wealthy, at least in the short term. Also, as the largest purchaser of law graduates’ labor, the legal sector sets their wages. If legal sector productivity has stagnated while other sectors become more productive, there are probably better long-term opportunities than law.

A crucial independent variable here is how long the depression will last. Given the dismal December 2013 Establishment Survey figures (and the Obama administration’s shameful spinning of them), things are bad. Here’s the employment-population ratio for 16 to 54 year-olds and my projection of them based on the positive growth since September 2011.

Civilian Employment-Population Ratio (16-54)

(Source: BLS)

If the legal sector is sensitive to employment levels and wealth concentration, then it’s going to be a long while until law starts paying off consistently from the demand side. From the supply side, obviously, there are far fewer people going to law school, and I’m hopeful (yes!) that the median graduate in a few years will have less law school debt than in previous years. It’s also obvious that the trivial accounting identity holds true: The first person who doesn’t go to law school is the first not to be unemployed after graduating. The real questions are (a) whether the demand-side factors really are as bad as I think they are, and (b) whether some law schools’ reputations are so insubstantial that legal employers would rather hire an unemployed graduate from a better-regarded school.

No, It’s Still Not a Good Time to Apply to Law School

Forbes contributor and University of Washington law professor Ryan Calo gives three reasons people should apply to law school if “bad news” has otherwise discouraged them.

(1)  “Fewer applicants means schools compete fiercely for decent students.”

So what? Getting into a slightly more reputable school still doesn’t mean that career-spanning legal positions will be there on graduation. Similarly, excessive tuition minus scholarships often still equals excessive tuition. Scholarships are given to the extent they keep a student from matriculating elsewhere, not to ensure students get good deals.

(2)  “A lot of law jobs will be opening up over the next five to ten years.”

Calo writes:

“The demographics are such that knowledgeable folks like the head of the Washington Bar Association are predicting a market gap.  They worry that future demand for legal services cannot be met by a dwindling supply.”

“Knowledgeable folks” should look at their state government’s data. Washington is projected to add 460 new lawyer jobs per year between 2010 and 2020. The state admitted 1,148 lawyers in 2012 alone. Reasonable people can question the accuracy of the projections, but they do estimate a replacement rate based on current occupational demographics and typical retirement rates. A shortfall in projected jobs due to slow growth is plausible, an unprecedented wave of boomer retirements is not.

Since Calo’s is the second report this week to argue that the medium-run situation is improving, let me add a few points:

  • In order to count, future law graduate jobs must be indefinite-duration, career-track positions that require a law degree or the knowledge and skills imparted in law school. No part-timers, no definite-duration full-time jobs, and decent starting client bases for self-employed lawyers.
  • No law professor positions. “JDs to create more JDs” is unsustainable, and there are more than enough law professors now.
  • Similarly, there should be minimal job displacement by new grads of old graduates. Certainly there are times when more productive newer graduates outperform older ones, but these situations should be the exception.
  • Employed graduates must be able to maintain a respectable living standard, save for retirement, and repay some of their loans. I’m willing to bend my opinion of IBR’s loan-cancelation feature in this context, but jobs for graduates who face massive tax penalties in twenty years do not count.

Because of the large backlog of JDs out there, secure jobs and compensation are a long way off, even if the number of graduates falls below the number of jobs created annually.

(3)  “Reports of the death of the legal market are greatly exaggerated.”

This line’s my favorite:

“I simply do not agree with the predictions that the legal market will, uniquely, fail to rebound with the rest of the economy.”

The unique failure of the legal sector to recover along with the economy is not a prediction. It’s an empirical fact.

Real GDP & Legal Sector Value Added (Billions 2005 $)

(Source: BEA)

Calo cites claims of clients’ disenchantment with biglaw and technological advances as driving a shift in demand for legal services. I agree that these phenomena may be exaggerated, but there is no reason to be optimistic about long-term trends, particularly in smalllaw.

Primarily, young Americans aren’t making money, so they aren’t getting married or building wealth (whether genuine or positional assets). Without wealth there’s little need to hire lawyers to draft wills and the like. Without marriages, people aren’t getting divorced (this might be good overall but not necessarily for lawyers, sadly). Without investment, people won’t start new businesses. Wealth concentration benefits a handful of lawyers handsomely, but overall the profession suffers.

In sum, the bad news about law jobs is in fact bad news about law jobs.

‘Economic Value’ Paper a Mistrial at Best, Part 2 of 2

[This is the second part of my response to the Simkovic and McIntyre article, "The Economic Value of a Law Degree" ("Economic Value") and the authors' response on The Am Law Daily. The first part of this response can be found here.]

Criticism 4:

“And [Leichter] largely ignores our extensive discussion of ability sorting in Section II.I. of The Economic Value of a Law Degree, while claiming that we did not consider these issues.”

False: I never discussed ability sorting in my article, so I ignored the “extensive discussion” in Section II.I. because it was irrelevant to my argument. Simkovic and McIntyre never demonstrated that legal education causes higher earnings.

It’s a pity none of the few—”though by no means all”—of the misrepresentations Simkovic and McIntyre charged me with were meritorious. Oh well.

Criticism 5:

“Studies by labor economists have found that increased earnings from education generally extend across multiple occupations.”

False: Simkovic and McIntyre never demonstrated that legal education causes higher earnings.

Also, applying the results of “studies by labor economists” about increased earnings for people with various types of education to legal education is an ecological fallacy. The authors must demonstrate that legal education alone is versatile.

Criticism 6:

“Any ability biases remaining after our controls may be offset by an equally important source of bias that Harper, Leichter, and many other critics have ignored: less educated, lower income households systematically over-report earnings and more educated, higher income ones under-report. Less-educated survey respondents tend to forget periods of unemployment, while more- educated households tend to forget end-of-year bonuses and SIPP caps maximum reported earnings to preserve confidentiality. This has been documented in SIPP surveys and it biases our results downward, making them too low, since the comparison group of bachelor’s recipients is systematically lower income than the law graduates.”

False: I ignore the bias because it’s not relevant to my argument: Simkovic and McIntyre never demonstrated that legal education causes higher earnings.

(Implied) Criticism 7:

“What does all this say about law school reform? On the one hand, untested reforms should not be rushed through primarily based on a sense of desperation or crisis, or a belief that changes couldn’t possibly make things any worse. On the other hand, the high returns to law school do not suggest that legal education can’t be improved—some reforms may be beneficial, and should be considered on their merits. Our preference, as always, would be to test proffered theories empirically as best as possible and we look forward to future work that does.”

False: “Economic Value” says nothing about law school reform whatsoever. If anything, it gives us a good reason to eliminate the subsidies to legal education because those subsidies make law school more expensive. Without unlimited, nondischargeable government loans law schools would have to reduce their tuition costs to remain solvent, which would increase the “premium” Simkovic and McIntyre believe they’ve discovered.

Bonus! Criticism 8:

“Leicther’s [sic] description of our take on BLS projections is lifted from context, since we note that even BLS economists are skeptical of these sorts of projections.”

The “context” is in footnote 10 where Simkovic and McIntyre write:

“BLS and other labor economists have cautioned against using occupational employment projections to guide educational investment.”

False: I frequently write about BLS employment projections, so these statements raised an eyebrow because the BLS has featured them prominently in its Occupational Outlook Handbook (OOH) for many years. The OOH pretty clearly targets a non-academic audience on the desirability of various careers, and nowhere does it caution readers to not rely on the 10-year projections, e.g. in the FAQs page. That’s not to say it encourages blind reliance, but it would take a substantial showing to persuade me that the BLS puts in so much effort in a project it doesn’t really believe in.

Here’s a taste of what the 1996-97 edition said about lawyers:

“Even though jobs for lawyers are expected to increase rapidly, competition for job openings should continue to be keen because of the large numbers graduating from law school each year. During the 1970s, the annual number of law school graduates more than doubled, outpacing the rapid growth of jobs. Growth in the yearly number of law school graduates tapered off during the 1980s, but again increased in the early 1990s. The high number of graduates will strain the economy’s capacity to absorb them. Although graduates with superior academic records from well-regarded law schools will continue to enjoy good opportunities, most graduates will encounter competition for jobs. As in the past, some graduates may have to accept positions in areas outside their field of interest or for which they feel they are overqualified. They may have to enter jobs for which legal training is an asset but not normally a requirement. For example, banks, insurance firms, real estate companies, government agencies, and other organizations seek law graduates to fill many administrative, managerial, and business positions.” [Emphasis added]

It’s curious that the BLS would publicly characterize the job outlook for lawyers with such lucid direness yet be “skeptical” of such projections. Looking more closely at footnote 10 explains why: Simkovic and McIntyre use a see-cite to just two articles to infer a general consensus within labor economics that the employment projections are unreliable. Neither article supports that inference:

  • The first quote, from an article by Horrigan, merely says that it’s difficult to predict how employers will respond to labor shortages in specific occupations. In both his abstract and conclusion he writes, “These projections form the basis for providing career advice to individuals entering the job market, changing careers, or making further educational and training choices.” This statement, appearing prominently twice, directly contradicts the inference Simkovic and McIntyre are claiming to draw from the quotation. Talk about taking things out of context!
  • This leaves the article by Neumark, Johnson, and Cuellar Mejia, which asks whether the retiring baby-boomer cohort will lead to a skills shortage. The quoted passage only says that the authors didn’t find higher underemployment of highly educated workers in their particular analysis of BLS projections and other data. In no way can their findings be imputed to all of labor economics. In fact, Neumark et al. address “conflicting evidence” produced by Harrington and Sum, who found significant evidence of “mal-employment” of highly educated people working in low-skill occupations and earning a scant premium as a result.

At best Simkovic and McIntyre can say that three labor economists in one paper disagreed with aspects of the BLS projections and that there’s disagreement among labor economists on the topic of mal-employment of highly educated workers. We still don’t know whether there is a consensus on the reliability of BLS projections or upon which side that consensus falls. Additionally, even if there is such a consensus, it isn’t necessarily correct. The labor economists Simkovic and McIntyre cite in their paper and others (including David Card from the previous post) tend to prefer human capital theories of higher education over signaling theories, and they rarely point out that elasticity of labor demand is a significant independent variable in occupational wages. In short, it’s reasonable to believe that they are either biased or that their human capital theory is wrong. Such things happen in academics.

Finally, again the authors demonstrate that they don’t really believe their own theory. They should be saying that the projections don’t matter because law degrees increase human capital for all occupations, not because they’re unreliable.

Wait, I take it back! People shouldn’t rely on the BLS’ lawyer employment projections after all…

BLS OOH Lawyer Employment Projections

(Source: OOH, BLS Monthly Labor Review)

…Because they regularly overestimate the number of lawyer jobs that will be created. Oh, but if law school graduates can’t get professional, demand inelastic jobs, then I guess we can’t say applying to law school is rational.

Conclusion

This isn’t meant to be an exhaustive response to “Economic Value” and its authors’ subsequent comments; it could go on and on and on forever, but I’d really like to stop here. Although through its errors their paper has indirectly taught me much about signaling theory and the factors that influence an occupation’s wages, I hope Simkovic and McIntyre leave legal education to more diligent researchers. It would be a tragedy if someone applied to law school based on “Economic Value,” and shame on anyone who uses the paper to induce anyone to do so. But one reason I’ve extended this topic much longer than it deserved is that I have a degree in the social sciences, and “Economic Value” is an excellent example of how not to conduct social science research. To sum up, here’s a list of the authors’ research offenses both in the paper and subsequently:

(1)  Not informing readers of alternative theories discussed in their own citations (“sheepskin effect” – In other papers this one might be minor, but it makes a difference in this case because the audience is not labor economists and readers are unlikely to read the article’s citations as I have.)

(2)  Not falsifying the alternative theories discussed in their own citations before conducting their calculations (“sheepskin effect” – Scientific method, shmientific method.)

(3)  Failing to acknowledge how limitations in their theory impair their methodology’s applicability to the real world (omitting elasticity of labor demand from their calculations by insisting occupations are not “pretreatment covariates”)

(4)  Avoiding discussion of potential intermediate causes (how can human capital theory possibly explain why those 25-year-old law grads in figure 4 go from earning $20,000 to $80,000 in a few years? – This might be attributable to simple oversight and it’s come up late, but given some of the errors here (esp. #5) on balance I think not.)

(5)  Not discussing the demographic content of the data they found for readers (who were the 1,382 law grads in the SIPP data? how many were in each age bracket (25-34, 35-44, 45-54, 55-64)? what jobs did the 25-34-year-olds have? what’s the frequency distribution of non-lawyer jobs? – This one is really egregious, even if it doesn’t have a material effect on the study’s outcome. Omitting a discussion of the data is a hallmark of bad social science research.)

(6)  Falsely charging critics with misrepresentations (at this point, this one’s minor)

(7)  Misrepresenting their critics’ claims (e.g. “distributional data” in Criticism 3)

(8)  Evading critics’ meritorious claims (non sequitur, path dependency, credential inflation—and these are just mine)

(9)  Misusing see-cites to misrepresent a consensus in a discipline readers may know little about (reliability of BLS employment projections)

(10)  Claiming their findings are applicable to real-world policy issues when they are not (legal education reform – Other papers might be able to get away with this, but not “Economic Value.”)

(11)  Omitting independent causal variables from their calculations, but conveniently using them to prove other points (elasticity of labor demand isn’t a “pretreatment covariate,” but it is evidence that lawyers aren’t going to suffer reduced earnings or be structurally unemployed in the future due to off-shoring/automation)

Any remaining advocates of the “law degree premium” or the bottleneck/backlog argument are invited to tell us what demand-inelastic, professional jobs law school graduates will eventually obtain. When will they realize their “premia”? Will it pay off their debts? Will they be able to have families, go on vacations, and save for retirement?

Law school optimists need to answer these questions. Unemployed law grads can’t wait.

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