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. 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 two articles to infer a general consensus within labor economics that the employment projections are unreliable. In neither article is that inference reasonable:

  • The article by Horrigan, for example, merely says that it’s difficult to predict how employers will respond to labor shortages. This is not exactly a sacred holy war against the OOH’s use of employment projections for career-guidance purposes.
  • This leaves the article by Neumark, Johnson, and Cuellar Mejia, which asks whether the retiring baby-boomer cohort will lead to a skills shortage. Again not a holy war against the employment projections that can sustain a see-cite inference. Neumark et al. also admit in footnote 4 that they are using a human capital theory in their paper, not a signaling theory. The authors do not discuss the sheepskin effect or elasticity of labor demand in their paper at all. Moreover, they do not consider dispersal of earnings.

At best Simkovic and McIntyre can say that the authors of these two papers alone don’t think people should rely on the employment projections when choosing a career—even that’s a stretch—but there are still a few other problems:

  • We don’t know if these authors speak for labor economics as a discipline.
  • If there is such a consensus, we don’t know if other economists and disciplines disagree with good cause.
  • The labor economists Simkovic and McIntyre cite in their paper and elsewhere (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.

‘Economic Value’ Paper a Mistrial at Best

Part 1 of 2

I’m responding to Simkovic and McIntyre not because their Am Law Daily article contains even one valid criticism of my original article but for two separate reasons. First, although most of the weaknesses of “The Economic Value of a Law Degree” (“Economic Value”) were uncovered promptly after its publication, surprisingly there are still a few substantive matters I haven’t seen raised elsewhere. Second, I expect “Economic Value” or its authors are going to pop up again sooner or later, and my life would be a lot easier if there were a reference post to link to detailing its flaws. Bonus, I’m a masochist, so while I can’t promise this will be the last time I write on this topic, I promise I will try to try.

We begin.

Criticism 1:

In a column published on July 25, 2013, Am Law Daily contributor Matt Leichter repeated many misrepresentations of our research that originally appeared on Above the Law—even after Above the Law posted corrections to its article and after we refuted many of these misrepresentations.”

False: All the representations I used from the Above the Law article survived the correction: The authors of “Economic Value” did not account for graduates after 2008 (page 13), include tuition costs in their lifetime value calculations (Table 7), or distinguish among graduates from different law schools (pages 49-50).

Secondly, nothing in the ATL post was relevant to my argument that “Economic Value” did not show that legal education causes higher earnings and was a non sequitur for legal education reform, nor was it meant to be. It was meant to show that the “Internet promptly erupted” when “Economic Value” first appeared.

The authors’ lack of basic reading comprehension skills is disappointing.

Criticism 2:

“Here are a few—though, by no means all—of Leichter’s misrepresentations. He claims, for instance, that we ‘assume law school pays off equally for non-lawyers’ when we do not make assumptions; rather, we measure the earnings premium regardless of occupation.”

False: Simkovic and McIntyre’s human capital theory requires them to assume that law school pays off equally for non-lawyers. Their theory states that the knowledge and skills imparted in law school improve graduates’ workplace performance as reflected by their higher earnings, even if they don’t work as lawyers. Importantly, people attempting to learn legal doctrines and skills outside of law school would be hopelessly confused without law professors’ guidance. Thus, insisting that one is “measuring a premium” is not a theory that explains why legal education causes higher earnings.

Without explanation, the authors reject signaling theory, an alternative that appears in an article by David Card cited in footnote 4 (PDF) of “Economic Value.” Card’s article displays a chart, though outdated, showing that professional school graduates make significantly more money than the trend predicts. Card identifies this phenomenon as the “sheepskin effect,” which means the additional earnings degree-holders obtain over what they would have earned with just an additional year of schooling.[i] Given that most states require a law degree to practice law, the sheepskin effect, which doubles here as a “licensed professional effect,” is probably very pronounced. The utility of the 58,000th minute of law school that the ABA mandates is very high indeed.

Card Chart

At this point, we should declare “Economic Value” a mistrial. The authors overeagerly tested the data without thinking through the theory discussed in their own citations. A “premium” cannot be measured until someone compares the earnings of law school graduates to the earnings of those who’ve completed all or nearly all the required law school coursework but didn’t graduate. If the earnings of both groups are the same, then the authors have a basis for claiming that law school increases people’s earnings based on the human capital theory.[ii] This study still wouldn’t necessarily invalidate all alternative theories, like law schools putting zorpqaq in their water fountains that makes people more productive, but it’d be a significant improvement. If the data on dropouts aren’t available, then for the sake of the highly indebted students we should assume that law school does not build much human capital.

But a mistrial is too generous for “Economic Value” because it still omits independent variables that increase lawyers’ earnings over non-lawyers’. Skipping ahead in their response, Simkovic and McIntyre contradict themselves on why graduates’ occupations matter:

“The literature on two forces often cited as major threats to lawyer earnings—outsourcing and automation—finds that jobs that require judgment and decision making have been less susceptible to these pressures than those that can be reduced to simple, repetitive, rule-based tasks. Several economists have argued that the tasks performed by educated professionals such as doctors and lawyers are harder to outsource or automated [sic] than jobs performed by those with less education.”

In other words, an occupation’s wages are determined not by education but by mundane market forces like the demand for the goods and services produced by the occupation and the supply of workers capable of meeting that demand. Demand for lawyers tends to be more inelastic than in other occupations because lawyers require “judgment” and “decision making,” which increase their wages. Adding the fact that wealthy people and corporations tend to spend heavily on legal services to signal their resources establishes a pretty clear explanation for why Simkovic’s and McIntyre’s law school graduates had higher incomes than similar college graduates. Education likely had little to do with it. A barista-barrister will not be paid a higher wage than a barista-bachelor for learning the material covered in law school.

Consequently, elasticity of labor demand in occupations also explains why it matters that so many law school graduates don’t work as lawyers, an observation Simkovic adamantly argues is inappropriate to investigate because “occupation is an outcome variable, not a pretreatment covariate.” But this is just econometrician-speak for “But if you reject our theory then we can’t use our sophisticated mathematical methodology!” Too bad: It’s not my problem that Simkovic and McIntyre adopted a theory that doesn’t account for all the variables that affect occupational wages (like the elasticity of labor demand)—variables the authors only acknowledge opportunistically to dismiss mass law graduate unemployment as a cyclical rather than structural phenomenon (e.g. page 36). If they really believed their theory, Simkovic and McIntyre would write that “judgment” and “decision making” don’t matter at all because legal education alone boosts law graduates’ incomes equally. The authors themselves cannot escape the implications stemming from most lawyers having gone to law school and many law school graduates working as lawyers and other professionals.

I should add that although “Economic Value” states in footnote 10 that “exploratory results” show that the non-lawyer law graduates in their data still earn more than similar college graduates, this is probably yet another composition fallacy that lumps together the earnings of 55-year-old Fortune 500 CEOs with 25-year-old bartenders who don’t have much workplace autonomy and whose law degrees are effectively worthless. I hope the next time researchers use the SIPP data, they tell us who the people in the datasets are instead of water-boarding them with econometric tools.

Criticism 3:

“[Leichter] claims that we ignore distributional data when we report it.”

False: I claimed Simkovic and McIntyre omitted dispersal of incomes, not “distributional data,” which the authors describe as the “relative advantage” law school graduates have over similar college graduates (page 32). The relative advantage means that at any given percentile, law school graduates will earn more than similar college graduates (unless they both earned nothing). This is no surprise given that lawyers earn more than non-lawyers and lawyers rarely lack law degrees, biasing law grads’ incomes upward due to reasons other than education. The authors’ methodology mathematically trivializes law graduate underemployment by design, which is why I wrote, “Their argument boils down to a circular claim: Law school pays off because it’s impossible for law school to not pay off.”

If the authors included dispersal of incomes (and occupation information), we would have been able to see why, for example, the mid-20s law school graduates in the bottom of figure 4 had such paltry earnings.

Figure 4

How often do law school graduates go from earning less than $20,000 annually to nearly $80,000 a few years later? This is why absolute incomes matter and why we need to know their dispersal.

To Be Continued…


[i] A subtlety in Card’s chart: Male professional school graduates aged 40-45 in 1990 had fewer than 18 years of education on average yet showed a significant earnings boost above the trend nonetheless. Nowadays, professional school graduates probably have 19 or more years of formal education. This alone should raise suspicions that the sheepskin effect is boosting professional school graduates’ earnings, not education. Corollary: Shortening formal professional education requirements will not substantially impair the delivery of professional services.

Also, Card’s chart significantly understates the sheepskin effect’s impact on bachelor’s degrees. For example, one study found a 27.8 percent bonus to earnings over just the additional year of schooling, and even a negative effect on the 17th year, which would usually coincide with the first year of law school.

[ii] Additionally, they can test the earnings of law school dropouts—say, anyone who’s completed at least a year—against those of demographically similar college graduates on the hypothesis that if legal education generates a premium, then the dropouts earnings ought to be noticeably higher than the college graduates’.

The Economic Value of the 58,000th Minute of Law School

…Is totally what I would’ve titled my Am Law Daily article on “The Economic Value of a Law Degree” if I didn’t have to waste words explaining it. Instead you’re getting:

Paper on Law Degree’s Value a Non Sequitur

There are two things, among many others, I wanted to add to the article that didn’t make it to the final cut:

(1) On page 44, it says,

Thus, on average and ignoring obvious behavioral changes, the federal government would hypothetically profit from legal education even if it provided legal education free at the point of service.

This is about the moment that I opened to the possibility that “Economic Value” was a hoax like Alan Sokal’s famous “Transgressing the Boundaries: Toward a Transformative Hermeneutics of Quantum Gravity,” because it’s the exact kind of absurd policy proposal that a satirist would put into an article claiming law school is worth the money. Just hedging my bets. (Please be a hoax. Please be hoax. Please be hoax.)

(2) Otherwise, “Economic Value” is the “Reinhart and Rogoff” of legal education. I’m surprised I haven’t seen the parallel made elsewhere, and we really should have seen it coming. Sure, it’s probably not going to contain any MS Excel errors or strange weightings, but it’s causal theory is equally nonsensical and should not be taken any more seriously than “Growth in a Time of Debt” is taken today. If anything it should be less so given that we can find graduates and drop outs who did not benefit from law school even as we can find countries that struggle with debt and low growth.

The Cost of Law School Does NOT Influence the Cost of Legal Services

John O. McGinnis and Russell D. Mangas, “An Undergraduate Option for Legal Education,” courtesy of TaxProf Blog.

I dealt with McGinnis’ and Mangas’ argument way back in January 2012 on the Am Law Daily, back in those halcyon days when it was just a Typepad blog. Now, the authors have sharpened their argument first laid out in The Wall Street Journal many moons ago into a full-fledged journal article.

I don’t want to spill too many more electrons on this because I fully endorse their proposal to make law an undergraduate major. It would certainly save students time and money, and for McGinnis, a law professor, to support that signals his willingness to argue against his own interests. This is good, as is the article by another law professor, Douglas A. Kahn of the University of Michigan, who argued the same thing in The National Law Journal a couple weeks ago. Credit where it’s due.

However, three things annoy me about McGinnis’ and Mangas’ article:

(1)  Unlike professional economists, McGinnis’ and Mangas’ actually discuss the impact of marginal cost theory on wages (instead of comparing lawyers’ earnings to those of people with the same number of years of education), yet they frustratingly veer off into nonsense territory by supporting the “higher education theory of wages,” which basically marries the versatile juris doctor theory to the labor theory of value—both discredited. For example:

With educational debts that they cannot discharge [lawyers] may exit the legal profession for other more lucrative work open to the well-educated if their fees continue to fall beyond that which allow them to comfortably service the heavy debts often necessitated by graduate school education. (14)

But demand for lawyers is not the same thing as demand for JDs. There is no evidence of a causal connection between more education and higher wages, it’s only correlational, and plenty of people who have JDs work in jobs that do not require them, making law school a waste. I covered what happens to doctoral and professional degree holders last year. We don’t know what happens to JDs specifically, but overall, given that the legal profession has been saturated for decades, it’s likely that they are not using their degrees for their jobs unless they obtain further education to become audiologists, for instance.

(2)  McGinnis and Mangas ignore juris doctor oversupply and assume that the marginal cost of hiring a new lawyer must include the cost of sending someone through law school at current prices.

If [the marginal cost of providing legal services] is measured even farther back, when the future attorney has just received his undergraduate degree, it will include the cost of a graduate law degree and the opportunity cost of not working for three years … As this example illustrates, over a long enough time period, marginal cost includes all costs incurred to provide the service. At that point marginal cost equals total cost. (15)

If a law firm that needs a new lawyer, the marginal cost is the time and effort spent finding a licensed attorney. This is not an expensive process as there are many people who are licensed but aren’t practicing or who are practicing but aren’t paid much. Moreover, the marginal cost certainly stops at finding someone who has a JD. Why? Because there are hundreds of thousands of people who already have law degrees (and probably paid less for them). The expanding firm doesn’t need to pay to send someone through law school, college, high school, nursery school, etc. because the eligible workers are already there. Heck, the firm could find someone who’s given up after failing the bar exam and send them to take the test again after doping them with Adderall. You can see how many “Idle Attorneys” there are in each state here.

Consequently, the market value of a JD, independent of other factors like prestige and experience, is nearly zero. This is the reason to reduce the number of years of legal education. The current system places all risk on the would-be lawyer while the schools and the employers bear none of it, even though there’s little demand for new juris doctors.

(3)  Thus, McGinnis and Mangas assume that education costs are passed forward to clients, ignoring all evidence the contrary.

I won’t quote from the section on pages 18-19 which attempts to augment Herwig Schlunk’s calculation of the net present value of legal education with the potential savings of cheaper legal education to clients, but it falsely assumes that student debt logically cannot impoverish debtors, as though wealthy employers are spearheading the student debt movement. If this were true, then an unemployed person could buy real estate in midtown Manhattan and instead of renting it out demand a high-paying job from a grudging employer to pay off the mortgage.

That should sound silly to you, but throughout McGinnis’ and Mangas’ article runs what should be an equally silly incredulity about law school graduates’ long-term outcomes. Like, if you were to present them with the facts, they’d say, “But that would mean law school has been a bad investment for decades, and we all know that law graduates are trained professionals who always have access to good jobs (except during recessions).”

I could say more about this, like why firms aren’t jumping on graduates from the cheap Puerto Rican law schools, or public law school versus elite private law school graduates, or cheaply trained California lawyers, etc., but I think I’ve remade the point: Those who think cheaper lawyer training will lead to cheaper legal services will be disappointed when that doesn’t come about, not that cheaper training is a bad idea.

But You Can’t Eat Passion

Or can you?

Catherine Groux, “Law School Students Use Passion and Flexibility in Struggling Job Market,” U.S. News University Directory.

The U.S. Bureau of Labor Statistics states that [the reason the NALP says the employment rate for 2012 law school graduates hit its lowest point since 1994] is largely due to the fact that accounting firms and paralegals now handle many of the tasks once reserved for lawyers.

No, that is not what the BLS said. Its reference to paralegals and accounting firms was a future projection:

[G]rowth in demand for lawyers will be constrained as businesses increasingly use large accounting firms and paralegals to do some of the same tasks that lawyers do.

The BLS said that some amount of the current law graduate underemployment is due to there being too many law schools:

Competition should continue to be strong because more students are graduating from law school each year than there are jobs available.

The important words being “should continue” because it’s been going on before. The other reason the 2012 grads couldn’t find jobs is that the currency isn’t circulating, i.e. the economy is in a depression.

Yes, rich people are loaning the government money at a loss.

But that’s just par for the course. The substance of the article is much more entertaining:

According to a new survey by Kaplan Test Prep, half of pre-law students say they plan to use their JD in a non-traditional legal field, largely because of the current job market for lawyers. Approximately 43% of these individuals said they hope to use their legal degree to work in the business sector.

Oh God, half of pre-law students are sold on the juris doctor’s versatility?

Although the legal industry is struggling, many students say they want to earn a JD because they are passionate about law. About 71% of pre-law students said the main reason they are applying to law school is to “go into a career [they] are passionate about,” while only 5% said their primary motivator was the potential for a high salary.

Passion won’t make those bondholders sell their inflation-protected Treasuries and invest in real goods and services.

According to the Kaplan survey, 43% of pre-law students said they would be likely to postpone or alter their law school plans if they did not receive enough financial aid.

Except we all know they will receive enough financial aid—as much as they can spend really.

**********

In other news…

Tom Brennan, “The Looming Threat for South Korean Law Grads? Unemployment,” The Asian Lawyer.

The large expansion in the number of law graduates stems from the introduction of U.S.–style postgraduate law schools in 2009. Before then, the law was only open to 1,000 students a year who passed a notoriously hard bar exam and then trained at the government’s Judicial Research and Training Institute. Unemployment was practically unheard of in this elite group. But the 25 new law schools pumped out about 1,900 graduates from their first classes last year.

I wrote a while ago on how Japan did the same thing: Adopt the defective U.S. legal education model right as it alienates just about everyone outside the law schools.

**********

And finally, you should watch this:

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Send a Comment to the ABA Task Force on the Future of Legal Education

A while back I wrote about how the ABA was convening a Task Force on the Future of Legal Education and how it has its work cut out for it. It’s asking for comments before its February 9 meeting in Texas, so if you feel like saying something, do so. I’m reprinting my comment here, with a couple of corrections to watch out for in the endnotes. I admit I didn’t plan on submitting a comment until I was asked to, but it helped me summarize my thoughts on what the problems are and how they should be solved. It also gave me an opportunity to dumpster-dive into the LSTB and find posts on topics that don’t come up often but lurk in the background. The LSTB crested 300 posts recently, so there’s a lot there.

I’ll add that some of the comments are quite good (UC-Hastings dean Frank Wu’s is getting some deserved attention), and I mentioned a few of the better ones. I’ve at least skimmed through all of them (not so much the one by the Canadian lawyers that spanned hundreds of pages), but of the ones uploaded after mine I recommend most the one by UC-Los Angeles law professor Richard L. Abel because it addresses the history of how lawyers are licensed in the U.S.

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

Matt Leichter

[email]

lawschooltuitionbubble.wordpress.com

January 16, 2013

Task Force on the Future of Legal Education

c/o Art Garwin, Deputy Director

Center for Professional Responsibility

American Bar Association

futurelegaled@americanbar.org

To the Honorable Randall T. Shepard and Task Force members,

I write at the encouragement of Task Force member Thomas Lyons, and I thank you for considering outside opinions such as my own. The Task Force is to be commended for accelerating its timetable, for such eagerness reflects positively on the ABA’s willingness to take seriously the problems facing new lawyers and legal education.

Until now, legal education reform has primarily focused on what I consider “demand-side issues”: furnishing more accurate information about law school graduates’ employment outcomes to prospective applicants so they can hopefully make informed decisions about becoming lawyers. The ABA Section of Legal Education and Admission to the Bar responded quicker to the information deficit than I’d predicted, but the successes of demand-side reforms of legal education pale against those problems remaining on the supply-side of lawyer licensing: The barriers to obtaining a law license (which includes law school costs) are too high and arbitrary, and they harm both aspiring lawyers and the public the profession serves. I recommend the Task Force consider legal education as one of many practices that require reform.

The Task Force Should Encourage the ABA to Shift Its Position on Federal Student Loans and Bankruptcy Reform, Embrace Novel Education Financing Options

            That said, the education requirement for becoming a lawyer is obviously the most salient issue today, but recognizing that one of the Task Force’s subcommittees is dedicated to improving the delivery of legal education, I believe this is one of the last items that require revision. Overall, I find demands for “practice-ready” attorneys to be a distraction from more legitimate concerns. If employers want certain skills they should train their workers themselves and advocate simplifying the lawyer-licensing process accordingly. That’s how it works other industries, and asking educators to provide training for jobs that employers aren’t obliged to create costs students unfairly.

Rather, the dominating problem with law school is the over-generous Federal Direct Student Loan Program (DLP), which obligingly lends most students up to $20,500 in Stafford loans and the remaining total cost of attendance plus living expenses in Grad PLUS loans each year. I believe that access to unlimited student loans, well-intentioned as it may be, enables law schools to increase their tuition for as long as people are willing to attend them.[i] I suspect that without Grad PLUS loans and the restrictions on discharging private student loans in bankruptcy, both authorized in Congress’ 2005 bankruptcy reform,[ii] tuition at private law schools would have begun to level off or even decline by now because students would have been unable to finance it.

My views break with those long held by the ABA, which regularly supports increased lending to law students,[iii] and calls for ending the DLP are often met with hostile responses that the legal profession would only be accessible to the wealthy. I disagree. With the Bureau of Labor Statistics predicting a surplus of law school graduates into the indefinite future, I see no justification for the government to lend money to people to buy degrees for which jobs are unavailable.[iv] Nor am I convinced that legal education is a public good requiring government support. I further believe the often-made claim that legal education is versatile and opens job opportunities beyond law practice to be unsubstantiated and fallacious.[v] Cheaper lawyer training is possible, and the current system does not open doors to the poor but in fact creates poverty by saddling law students with large loan burdens.

Consequently, many of the people who will graduate law school in the future, to say nothing of those from the past, will have very large debts and no place in the legal profession commensurate with the effort they put into law school. Although the government’s Income-Based Repayment (IBR) plan will rescue these students from destitution, it will still require them to pay essentially an additional, regressive tax on their earnings for twenty years, which will be acutely felt if they are not working as professionals. IBR’s loan cancelation privilege (if it is not abolished in the near future)[vi] coupled with excessive loan burdens persuade me that the federal government will lose billions of dollars canceling money lent to law students. Law schools and the ABA ignore the approaching confrontation with legislators at their own peril.

The ABA’s most-recent response I know of to existing student loans is to advocate requiring private lenders to extend IBR-like protections to debtors.[vii] I think instead the ABA should shift its position towards reforming the bankruptcy code to restore full bankruptcy protections to all student loans and ending the DLP. It can also encourage state governments to require their public universities to offer, instead of debt financing, an equity option called “human capital contracts,” which obligate graduates to pay a certain portion of their incomes for a fixed time period back to their universities. Unlike IBR, this type of policy forces universities to internalize the costs of their own programs, and if their programs become insolvent, universities should terminate them.[viii] Embracing these policies would signal to the public that the ABA understands the causes of factors enabling law school tuition increases and excessive student debt, and it would begin to heal the generational rift forming between new law school graduates and the profession from which they are increasingly alienated.

As for the law schools themselves, the student loan system animates many of their frequently discussed inefficiencies, such as competition over U.S. News rankings, overcompensation of employees, needless new buildings, funding positions for graduates to improve their employment statistics, over-focusing on GPA and LSAT scores at the expense of other factors,[ix] and using fees from some students to attract well-credentialed students with scholarships. If possible, rather than regulating bad behavior, the ABA should address the incentives that encourage bad behavior.[x]

Even other reforms such as easing accreditation requirements or reducing the required number of credits for law school[xi] might not affect how law schools operate so long as their students are fully financed by the government. For example, many private law schools that do not rank very highly on U.S. News are nevertheless very expensive. Also, the lure of federal loan dollars is so powerful that many law schools in states that license graduates of non-ABA institutions forgo the option of delivering cheaper legal education in favor of national accreditation and the DLP loans that accompany it. For these reasons I believe the Task Force should take student loan reform as the most urgent priority for law licensing and legal education reform.

The Task Force Should Encourage Bar Authorities to Reduce Remaining Entry Barriers to the Profession

Student loans, however, are not the only problem the profession’s entry system faces. In recent years critics have used the discontent directed at law schools as an opportunity to advocate for deregulating the legal profession entirely. Many of their arguments are poorly researched, particularly those demanding reform by claiming without evidence that doing so would cure an attorney shortage in the United States.[xii] They are correct that the profession’s entry barriers are arbitrary, and the longer the profession defends them and the DLP, the more likely outside forces will unilaterally rescind its autonomy. Outside of the risk of incompetent practice, this might not be a bad thing, even if done for the wrong reasons, but rather than resisting calls for change, the Task Force should acknowledge the weaknesses in most states’ lawyer-licensing rules and encourage efforts to change them.

For instance, bar exams in their current form are not defensible entry barriers. They almost always occur long after bar petitioners have sunk enormous costs into legal education,[xiii] they are too hard for some people who might otherwise make fine lawyers (“false negatives”), they test many obsolete legal doctrines, and they also omit entire substantive practice areas to which many attorneys dedicate their entire careers. Although I agree that some showing of legal knowledge (especially of ethics and constitutional law) is justifiable, demanding too much is not. Streamlining bar exams along practice lines would greatly reduce the incidence of false negatives among bar petitioners and conserve resources for all test-takers.

Simplifying the bar would also reduce the possibility of law schools knowingly accepting applicants who probably lack the aptitude to pass the exam because of the correlation between LSAT scores and bar passage.[xiv] Perhaps between five and ten percent of ABA law school graduates who take a bar exam never pass. Some test-takers might take more than one exam, passing one and not another, but the ABA should do everything in its power to prevent law schools from enrolling students who will waste precious time and money for a license they probably will not obtain, even if it means tightening bar passage requirements for accredited law schools. It’s unfair to deny people a place in the profession because the exam wasn’t calibrated to the knowledge they need as practicing attorneys. It’s also unfair to the clients they could have served.

It’s also probable that the law licensing system allows too many “false positives,” people who by virtue of their LSAT scores and GPAs appear to make good lawyers but don’t.[xv] I’m not knowledgeable of data on firm associate retention rates or similar topics, but front-loading the legal education requirement makes it too easy for people who do not know if law practice suits them to enter the profession. It also widens the information asymmetry between law school applicants and law schools, which the latter has greatly used to their advantage by admitting applicants who serve law schools’ reputational goals before their students’.

The mandatory legal education requirement doesn’t serve potential lawyers well either. For instance, the aforementioned correlation between LSAT scores and bar passage rates disserves those on the opposite end of the bar exam aptitude spectrum as well, which raises the question: Why require someone who will likely pass the bar exam by self-study anyway to attend law school? If the principal benefit law school provides these individuals is signaling their competence for good job opportunities, then I believe the Task Force should consider eliminating the formal legal education requirement altogether.

Conclusion

Declining applications and hostility towards law schools and law practice are teaching the public that demand for legal education (or, rather, law licenses) is not connected to demand for legal services. If the near-term solution to many of legal education’s problems is curbing the government’s lending to law students, the longer-term solution is to align the profession’s licensing system to the public’s need for legal services. I believe adopting my suggestions will accomplish both goals.

Thank you for considering my thoughts.

Regards,

Matt Leichter


[i] For information on the theoretical basis of my beliefs, I recommend, Andrew Gillen’s “Introducing Bennett Hypothesis 2.0,” from the Center for College Affordability and Productivity. http://centerforcollegeaffordability.org/uploads/Introducing_Bennett_Hypothesis_2-1.pdf (PDF). I have yet to see a convincing author discredit Gillen’s analysis.

[ii] [Update: This is incorrect. Grad PLUS loans were authorized separately from bankruptcy reform by Congress in February 2006.]

[iii] See e.g. ABA president Carolyn Lamm, “Law School Debt Has a Manageable Solution,” 2009. http://www.americanbar.org/groups/law_students/initiatives_awards/advocacy/debt_solutions.html

[iv] Bureau of Labor Statistics, “Lawyers,” Occupational Outlook Handbook. http://www.bls.gov/ooh/legal/lawyers.htm

[v] Matt Leichter, “The Juris Doctor Is ‘Versatile’ Thanks Mainly to Numerous Logical Fallacies,” The Am Law Daily, August 14, 2012. http://www.americanlawyer.com/PubArticleALD.jsp?id=1202567415810&The_Juris_Doctor_is_Versatile_Thanks_Mainly_to_Numerous_Logical_Fallacies

[vi] One bill that may make its way through Congress proposes to end the loan forgiveness portion of IBR for future students, which will condemn many law school graduates to a lifetime of debt. http://www.bloomberg.com/news/2012-12-04/student-loan-collection-targeted-for-overhaul-in-congress.html

[vii] ABA Resolution 111A, Young Lawyers Division, http://www.abajournal.com/files/111a.pdf (PDF).

[viii] Similar ideas have been proposed by a student organization advocating reform of the University of California systems, called “FixUC,” which I wrote about here: http://lawschooltuitionbubble.wordpress.com/2012/01/23/fixuc-stumbles-onto-human-capital-contracts/.

[ix] One comment to the Task Force that illustrates law schools valuing incoming student credentials over applicants’ strengths is by non-traditional law student Elizabeth Paskiewicz, who has significant experience in the legal profession as a non-lawyer and performed very well in her paralegal education, but most ABA law schools overlooked her because of their mechanistic decision-making processes that exclude applicants with low undergraduate GPAs.

[x] For example, even without the student loan system, law schools still have an incentive to compete over their magazine rankings, which is fine, but they may still falsify student data they send to the ABA. If so, then auditing them is a good idea.

[Update: This sentence didn't come out right. Something more like "If possible, rather than regulating bad behavior, the ABA should address the factors that aggravate bad behavior." My point is that we might not be able to live in a world where law schools don't engage in needless competition (over their U.S. News rankings, for example). Regulations like auditing make more sense if addressing the loan program is insufficient.]

[xi] Although there have been growing calls (most recently in New York) to reduce the education requirement from three years to two, I discourage the Task Force from endorsing such proposals simply because the third year is expensive and not useful. This ignores the root cause of tuition increases, and one private law school in five has raised its tuition by 50 percent or more since 1999, meaning two years in 2011 buys a full degree then. Rather, I recommend the Task Force address the DLP but flip the question of usefulness around: How much formal legal education is necessary and why?

[xii] The primary example that springs to mind is Clifford Winston’s, Robert W. Crandall’s, and Vikram Maheshri’s book, The First Thing We Do, Let’s Deregulate All The Lawyers, 2011. A blurb from their Wall Street Journal article on the subject can be found on TaxProfBlog: http://taxprof.typepad.com/taxprof_blog/2011/08/its-time-.html. I’ve written more on the topic: http://lawschooltuitionbubble.wordpress.com/2011/08/23/wsj-op-ed-brings-shock-doctrine-to-law-practice/, http://lawschooltuitionbubble.wordpress.com/2011/09/02/the-economist-has-never-heard-of-the-bureau-of-labor-statistics/.

[xiii] One influence for this section are the sentiments expressed in the comment to the Task Force by Nicholas L. Georgakopoulos.

[xiv] Here are two examples documenting the connection: http://www.unc.edu/edp/pdf/NLBPS.pdf (PDF); http://academic.udayton.edu/thewhitestlawschools/2005twls/chapter2/Legaled04.htm (more recent, but hearsay).

[xv] I believe the “26 factors of lawyer effectiveness [plus one]” cited in Nancy B. Rapoport’s comment to the Task Force are the definitive factors for “true positive” lawyers.

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