Household Spending on Legal Services Declines Too

But first, I should inform you that for the second year the ABA Journal has chosen to admit The Law School Tuition Bubble into its Blawg 100. It states:

Matt Leichter makes data-driven arguments in favor of changes to the legal education system. Anyone concerned about the levels of student debt and the state of employment in the legal industry would do well to visit his blog and examine his data firsthand.

I endorse this characterization, and you can endorse my Web site here.

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Speaking of data about the legal industry…

A brief follow-up to Monday’s article on the legal services industry’s continuing contraction: It turns out a few months back the BEA updated its personal income and outlays tables. Although they can only tell us about household consumption of legal services, the data go back much further than the GDP by industry tables do, and arguably household spending on legal services does a better job of capturing the health of the legal services industry for lawyers who enter small practices. I discussed them before here.

There are a few relevant findings.

One, inflation-adjusted household consumption of legal services fell by 3.27 percent in 2013. It’s about 15 percent less than in the peak year, 2003.

Percent Change Real Personal Consumption Expenditures by Function

(Source: National Income and Product Accounts, Table 2.5.3., author’s calculations)

Two,  the peak year for legal services as a share of total household expenditures was 1990 (1.09 percent); in 2013 it had fallen to 0.85 percent. It’s comparable to 1983 or 1973.

Legal Services Share of Household Consumption Expenditures

(Source: NIPA Table 2.5.5., author’s calculations)

The point isn’t just that households are spending less lawyers, it’s also that legal services historically have been a trivial expense. Americans spend about twice as much on higher education than legal services (but they certainly didn’t use to!). By contrast health care surged from 6 percent in 1959 to 21 percent in 2013. Compare that to the public perception of lawyers.

Three, household spending on legal services as a share of the industry total has been declining since the early 2000s.

Personal Consumption Expenditures of Legal Services Share of Legal Services Industry

(Source: NIPA Table 2.5.5., GDP by Industry Value Added, author’s calculations)

All of these trends point to the withering of small-law. I am pessimistic of the outlook over the next several years.

Commerce Dept.: Legal Services Sector Contracts (Again) in 2013

Earlier this month the Commerce Department’s Bureau of Economic Analysis (BEA) updated its GDP by industry data. The chief finding for law-watchers is that in 2013 the legal services industry shrank by 2.9 percent. Ouch. The legal services industry includes all private law firms, and it employs about half of all lawyers. Meanwhile GDP grew by 2.2 percent, meaning that once again, the shriveling legal sector is being outdone by the rest of the economy.

Percent Change Real Value Added by Industry

(Source: GDP by Industry (xls), author’s calculations)

[Correction: Half of wage and salaried lawyers work in the legal services industry; most self-employed lawyers probably work there too.]

I’m providing moving averages to illustrate the break between the legal sector and GDP that began in 2005. That’s not to say things were hunky-dory before, just that those data still haven’t been revised yet. Go ahead, look at the old data and show me the situation was better before 1997. I dare you.

To editorialize, yes, the annual updates are horse-race reporting and recent years get revised a little bit each time, but I’m not enjoying reporting on the contracting legal sector nonetheless. I’m genuinely surprised that it’s still doing so badly, and I thought the Great Law Depression would’ve leveled out by now. Maybe future years and revisions will bear that out, but it’d take a sustained period of significant growth for the outlook to improve. Even a single year of 2.9 percent growth wouldn’t persuade me things are getting better, but even a piddly 0.4 percent would be nice to see.

To make things worse, when drilling into the real value added components, “compensation of employees” has been consistently contributing to the decline.

Contributions to Legal Services Real Value Added

(Source: GDP by Industry (xls), author’s calculations)

Only “taxes on production and imports (less subsidies)” has been growing consistently in the last three years.

The legal sector’s productivity measures are similarly unrelentingly bleak. Real value added per person engaged in production has fallen by about $20,000 since 1997 while the same measure has grown steadily throughout the economy and for the legal industry’s sibling in the “Professional, Scientific, and Technical Services” category, “Computer Systems Design and Related Services.”

Real Value Added Per Person Engaged in Production

(Source: Real Value Added by Industry, NIPA Table 6.8, author’s calculations)

If things keep going at this rate, the average legal services worker will be indistinguishable from the average worker overall. I guess it’s a good thing that the mean average worker isn’t anything like the median? It’s clear, though, that computer design is a much better candidate for “golden-ticket industry” than legal services.

Finally, we have the Bureau of Labor Statistics’ output per hour measure of labor productivity, which is a bit sharper than the real value added per person engaged in production estimated above.

Percent Change Output Per Hour

(Source: BLS Nonmanufacturing Multifactor Productivity Tables)

Here too, the long dashed moving average line (legal services) is comfortably below the thick line (nonfarm business), showing that the legal sector is not becoming more productive with the rest of the economy. More alarmingly, it’s lost about 8 percent of its productivity since 2007, and now the amount of private legal services the country is getting per hour worked is about what it was in 1988.

In conclusion, the data again depict a sputtering industry. For all the reporting on the declining supply of future law graduates, little is said about the long-term trends in the sector that’s most likely to drive demand for their services. Increasingly it appears to be dwindling while at the same time better opportunities for workers are forming in other sectors.

The Legal Recessions That Weren’t

I don’t read The New Yorker regularly, but I’m of the demographic that does, so it pained me to read the first two sentences of its article, “The Legal One Percent.”

After every recession since the Second World War, the legal profession swiftly and robustly recovered. Not this time.

This is not what the data say. The legal sector (which isn’t the same as the legal profession, but given that the article goes on to cite profits-per-partner data I think that’s what The New Yorker means) has done terribly after recessions since the late 1970s. Although the BEA still hasn’t updated its industry data for the period between 1977 and 1997 per its comprehensive revision, the older data show the overall stagnation.

Legal Sector Real Value Added

It took five years for the legal sector to recover to its 1979 high, and then eight years to get back to where it was in 1990. This is supported by data on household consumption expenditures on legal services, as well as the Labor Department’s measure of employees in legal services.

Household Consumption of Legal Services

Per capita spending on legal services probably peaked in 1990, and it’s probably fallen to its 1960s’ level.

The legal sector and the legal profession have been ailing for quite a while. It’s surprising that their stagnation is still misreported.

Most Americans Don’t Want to Live in Rural America

…Which is why rural America is rural. Deep insight, Grasshopper, but the ABA Journal isn’t so easily persuaded, as implied in its recent feature article titled, “In rural America, there are job opportunities and a need for lawyers.”

I largely addressed this topic last year in a bluntly headlined post, “Law Grads Not Responsible for Lack of Rural Lawyers,” and its primary point still stands: If there is so much demand for (retiring) rural lawyers, why weren’t they replaced ages ago? It can’t be because of a quality specific to recent law graduates—including lack of practical training.

Unfortunately, I think the ABA Journal could’ve pursued the specific question of why lawyers won’t open practices in rural communities more analytically. For example, it accepted that there’s unmet demand for legal work in Wishek, N.D., based only on the word of its retiring sole lawyer. For a community of 1,002 people one wonders why it needs any. In fact, the Economic Census I discussed last week doesn’t have 2012 figures for states, but it does provide them for prior years. In 2007, law firm receipts per capita were $726 nationwide; in North Dakota they were only $255, an indicator that law is not in such high demand in North Dakota. As far as “offices of lawyers” goes, North Dakota, it seems, had a flat number of establishments from 1997 to 2007.

Industry Snapshot ND 1 Industry Snapshot ND 2

(Note that the number of law offices in McIntosh County, N.D., in 2011 is unavailable, but the neighboring counties appear very sparsely lawyered as well.)

The mean average population per law office establishment in North Dakota seven years ago was one firm per 1,893 persons—well above Wishek’s size—and I suspect the median firm is in a larger community. Not that I put a lot of stock in lawyer- or law-firm-per-capita estimates, but if there’s anything the LSTB will be remembered for, it’s those.

Nevertheless, aside from using Census data, the article could’ve investigated this unment demand by asking Wishek’s retiring attorney what his income was over the last five years, let’s say. Was it greater after tax, shelter, and transportation costs than what one could get in a college-type job in Bismarck or the Twin Cities, assuming all law graduates make equal student loan payments on IBR? How much of that income came just from serving Wishek clients? Did he regularly have to drive to represent people, and if so how far? What about his clients’ travels to consult with him? How much of his clients’ problems were due to rural poverty rather than lack of access to representation? Which problem should be prioritized?

More broadly, and this applies to the ABA’s immediate-past president’s apparent position that there’s a “paradox” of unment legal needs and too many law school graduates, there’s a difference between a “shortage” in economics and in common parlance. In economics, a shortage occurs when the price of a good or service falls below its equilibrium level, i.e. it’s so cheap that everyone buys it up before its price rises. By contrast, a shortage as commonly understood—the definition the Journal is using—is when poor people can’t afford to buy something but still need or want it.

The difference is important, and while I have my issues with neoclassical economics’ definitions and trivialization of poverty, its point is to distinguish between situations in which people merely want things as opposed to when market failures prevent them from buying them even though they have dollars in hand. One is measurable (usually); the other is not (usually). Maybe the legal profession relishes treating late-stage capitalist urbanization as a sudden problem rather than a long-term phenomenon, but I’ll take a stab: Even when rural Americans have the dollars in hand, the invisible costs of such a significant relocation cannot be ignored. Personally, I believe plenty of lawyers (even new grads) would be happier living in a rural community than they might think, but it’s still a big risk. It essentially means abandoning one’s connections, be they family or friends, and it isn’t any easier to shift jobs or restart careers in a city if things don’t work out.

Thus, the total cost of inducing people to move ends up being more than the community can really afford. Indeed, people are moving away from these communities, so why should lawyers move to them? It’s like encouraging homeless people to move to North Las Vegas because it has so many empty houses. Other forces are at work.

That having been said, like the South Dakota community discussed in my previous take on this topic, Wishek appears to have solved the problem by paying for office space to encourage lawyers to move there. Paying people to work often creates jobs, Grasshopper.

So, good luck to the two people who have taken Wishek up on its offer. The five-year median household income in McIntosh County in 2012 was $36,327 and per capita income was only $24,134 (source: Census Bureau). The averages are much higher indicating that there are some very well-off people in the area, but no one should mind if they have to take a day off and drive 90 miles to talk to a lawyer.

So, again, whenever the “no rural lawyers bogey” pops up, consider whether the claimants are hyping a long-term problem that’s festered for decades or are just equivocating their terminology and saying that the poverty of poor people is a paradox. It’s self-evidently not.

Economic Census Shows Legal Sector Battered by Depression

But first, it appears the link to my American Lawyer article was bad, so here it is correct.

Now, today’s fun.

The Census Bureau is slowly releasing data from its 2012 Economic Census, a survey it produces every five years. In government data years, it’s like waiting for a total solar eclipse. Because the last Economic Census was in 2007, we now get another look at the kind of damage the Lesser Depression has had on the private legal sector’s specific “Offices of Lawyers” category.

Economic Census--Industry Snapshot (2012)

(Source: Economic Census Industry Snapshots 541110)

Generally, it’s bad. There were fewer people employed in offices of lawyers in 2012 than in 2002. Nor does it help that Census doesn’t adjust the dollar amounts by any inflation measure, so while it looks like the revenues and payrolls are rising, in fact they are not.

Economic Census--Industry Snapshot (2012, 2013 $)

(2013 $, author’s calculations)

I have two observations to make: One, given that employees per establishment fell, it appears that larger firms have been the ones paring back. Two, similarly, like the employment projections I frequently write about, the number of firms and employees is a net growth figure that combines gross outflows with gross inflows. In other words, many people ejected from large firms may have started or joined smaller practices. Consider this a downshift in the sector’s performance.

The supply of lawyers and whatever capital they need exists, but the demand does not and it doesn’t look like it’s coming back any time soon.

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.

Florida Legal Sector Peaks Higher, Troughs Lower Than Country’s

The Tampa Bay Times tells us, “Florida’s Swollen Ranks of Lawyers Scrap for Piece of a Shrinking Legal Pie“—a fair assessment.

As to whether there are too many lawyers as the article says, well, obviously there are as many lawyers as the state can employ at any given time. Whether the state (and the country) produces too many law graduates and licenses more attorneys than can be absorbed is a different matter. I sympathize with attorneys trying to make a living, but I am enjoined from complaining if clients are charged less as a result.

Here’s the relevant line:

Almost half of the lawyers who responded to a Florida Bar survey last year cited “too many attorneys” as the most serious problem facing the legal profession today. That exceeded “difficult economic times” and “poor public perception,” which many blamed in part on relentless TV advertising, such as that by big personal injury firms.

Surveys are important sources of information, but just because lawyers believe something doesn’t make it true. It’s difficult to separate the extent to which the “difficult economic times” and the “too many attorneys” cause lawyer underemployment. In fact, Florida’s legal sector peaked higher and troughed harder than the rest of the southeast and the country.

Real Legal Services (Fla. edition)

(Source: BEA, author’s calcs.)

Although, the surveyed lawyers have a point: It’s also true, as the article points out, that the number of law schools in Florida needlessly doubled over the last 15 years or so. Unhelpfully, the article publishes law schools’ unemployment rates rather than my preference: percent employed in bar-passage-required jobs, full-time/long-term excluding law-school-funded jobs. Here’re Florida’s law schools’ 2013 results:

  • Florida State – 69.6%
  • University of Florida – 66.4%
  • Stetson – 62.0%
  • University of Miami – 60.7%
  • Nova Southeastern – 60.5%
  • Florida International – 59.6%
  • Thomas – 47.8%
  • Barry – 39.8%
  • Florida A&M – 38.5%
  • Ave Maria – 34.6%
  • Florida Coastal – 30.8%
  • Average Florida Law School – 51.8%
  • Southeast BEA Region Average Law School (Excl. Fla.) – 57.3%
  • Average U.S.A. Law School (Excl. P.R., Fla.) – 56.1%

In general, Florida’s law schools are doing worse than the regional and national averages. Perhaps you could call it the Florida Coastal effect. I’m sure someone with more time on their hands than I could write a paper on the impact for-profit law schools have on state employment outcomes and state legal industries.

What surprises me, though, are the attorney counts stated in the article: They’re much higher than the number of active and resident attorneys Florida bar authorities report to the ABA.

Since 2000, the number of licensed attorneys has swollen from 60,900 to 96,511. … Florida had 27,000 licensed attorneys in 1980. Within 20 years, the number had more than doubled.

According to the ABA, in 2000, there were 49,139 active and resident lawyers in Florida, and 68,464 in 2013. I don’t have numbers for 1980, but in 1989, Florida had only 33,251 active and resident lawyers. Anyway, I get 39 percent growth since 2000, not the 58 percent the article implies.

Despite these bleak facts, as always we can rely on the deans to tell us to hail the JD Advantage.

So what’s the advice for those considering law school or soon to graduate? Until demand better meets supply, [LeRoy] Pernell of Florida A&M’s law school predicts that many new lawyers will have to use their education in “nontraditional ways.” Among them: working for businesses instead of law firms.

Some could also wind up in jobs that don’t require a law degree. …

[Christopher] Pietruszkiewicz, Stetson’s dean, advises interning, then working in a public defender, state attorney or U.S. Attorney’s Office.

Hopefully the message for applicants is clear: There are better alternatives than law school in Florida.

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