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.
(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.
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.
(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).
(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.
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.
Great post as always. I know this is off topic, but I would love to hear your take on the following paper about automation;
Click to access The_Future_of_Employment.pdf
The main reason being that it seems there is going to be a coming squeeze on more credentialed workers, via higher graduate output, since so many workers are going to be displaced.
For instance, Forbes had an article about a 55% increase in Petroleum Engineering graduates, from 1300- something to over 2100 in one year, even though the BLS states 2012-2022 there will need to be roughly 1900 new grads a year. Schools are just scooping up whatever applicants they can, without regard to prospective employment outcomes, and I fear that automation will make it worse.
I have written on robots-stealing-our-jobs in the past:
Dr. Krugman Visits Solaria
Alternatives for Krugman’s Luddites
What’s not in the two articles is that Moore’s Law is constrained by power consumption, so I’m not too worried that robots will be sophisticated enough to do day-to-day tasks. Those are actually the hardest ones to automate because they require so much versatility. The real question is how to raise their wages and ensure they benefit from productivity growth. Reducing labor costs by taxing land instead of wages is a big step.
Thank you for your reply. Very good points. I agree that ensuring productivity gains flow to workers adequately is a key issue. As for taxing land, I agree that is part of the remedy. My question would be what about the taxation of intangible property, like patents and royalties, which are growing in absolute terms as valuable assets and prospective income streams?
I’m all in favor of IP reform.
If anything I’m a modern Georgist, i.e. I’m in favor of taxing all monopoly rents wherever they come from, as well as Pigouvian and carbon taxes.
“though curiously solo practitioners are about as abundant as they ever were.”
Hmmm…really makes me wonder if “solo” is really just a catchall category for “partially employed” or “really unemployed”.
Which brings up the larger issue of survey methodologies…as with the calculation of national GDP (GDP growing while median HH incomes stagnating/falling? Really? Really??), I wonder if “lawyer productivity” doesn’t seem to yield bizarre results because the methodology used/data collected is, quite frankly, crap.
I think very close examination of government survey methodologies would often yield some very interesting results.
I also wonder if the productivity paradox you mention above isn’t, in some way, related to the bi-modal distribution of salaries (per NALP).
One of the great tragedies for the profession is that NALP has done a notoriously sh*tty job of collecting/reporting accurate placement stats for the profession (the NALP being *theoretically* less biased than the scum-sucking schools).
Had NALP reported out the bi-modal structure of placement salaries in 1999 (or, heart be still, 1989), a lot of ruined lives might have been avoided (and a lot fewer BMWs would have appeared in faculty parking lots).
Even today, the NALP tends to engage in one of the worst statistical abuses this rotten profession is (now) well known for – treating survey respondents as representative of law grads as a whole (ie, wholly ignoring self-selection bias).
The NALP continues to go out of its way to issue PR proclaiming median salaries (as reported by perhaps 60% of grads) as being indicative of grad salaries as a whole.
Which is very likely, utter BS.
As with the S&M paper, why is no one asking detailed questions about the 40% of the profession that seemingly disappears shortly after graduating?
I also wonder if that “vanished 40%” also doesn’t factor into your paradoxical productivity results.
That’s a good point about solos. In 1980 they might have been the traditional lawyer with an office. By now, they might be practicing part-time and reviewing docs the rest.
GDP is measured correctly (by its own definition). Growth without higher earnings for the masses is fully possible. And real. So I don’t think there’s anything wrong with the surveys or their methodologies.
The bimodal salary NALP thing is very persuasive evidence for my argument that legal sector productivity stagnation is due to change in the composition of the average hour of legal services. It’s pretty hard to say that the $160k starting salaries are the actual marginal product of new lawyers when biglaw could’ve hired any number of unemployed grads for substantially less. That’s why I was disappointed with that one Akron (I think) grad who responded to the guy on Business Insider who claimed that his law school scammed him. She thought that she earned her six-figure entry-level lawyer job through hard work and that luck played no role. For some reason, underemployed law grads don’t see it the same way…
The vanished 40% might or mightn’t factor into the results if they work in the legal sector. Bartender, Esq. doesn’t work in the legal sector and is probably no more productive than Bartender, B.A. The problem is that neither is paid much for their educations.
Interesting thoughts on the productivity issue (although I continue to think that measuring “productivity” is an intrinsically error prone exercise in a service industry like law).
“GDP is measured correctly (by its own definition). Growth without higher earnings for the masses is fully possible. And real. So I don’t think there’s anything wrong with the surveys or their methodologies.”
I’m going to have to (partially) dissent, sort of.
It is the “by its own definition” part that gives a lot of people heartburn – as with the “unemployment rate”, the “GDP” might really be a mostly misleading, politically engineered metric working to privilege DC’s power over everyone else’s.
(“Labor force”/”looking for work” definitional games allow DC to gin up the unemployment numbers that DC wants to gin up, within broad bounds).
And as employment-to-population (especially 25-to-54) is a vastly superior measure (relative to the heavily reported unemployment rate), I wonder if there isn’t a much better measure of “national economic growth” than GDP.
To take one (Keynesian, DC-favored) example – hiring one government worker to dig a hole and another to fill it up equals “GDP growth”. (And a two-fer!).
That’s the (DC-selected/mandated) “defintion”.
Has the nation really “grown” from *that* allocation of resources?
Keynes and the current GDP methodology would say yes.
And DC distributional power has certainly increased (by selecting *who* to tax and *who* to hire for hole digging)
But common sense suggests that hole digging/filling is a waste of resources.
Even if the “only” alternative is for “idled” workers to remain home (and contemplate the extent – and end – of DC perfidy).
It is the “hamster-wheeled” nature of “government spending led growth” that makes economic conservatives dubious of Keynesian solutions.
Not to mention that,
1) DC gets to pick the hamsters,
2) DC gets to pick the wheels,
3) DC skims the lettuce, and
3) DC gets to define/bully pulpit the actual worth of the whole circus
[blockquote]But common sense suggests that hole digging/filling is a waste of resources.[/blockquote]
Common sense is wrong with negative real interest rates.
When government borrows money to build a bridge, it pays real workers real dollars to build a real bridge that saves real commuters real minutes on their real commutes. Likewise, when government borrows money to hire teachers, it pays them real dollars to teach real subjects (hopefully) to real students. The teachers spend their real dollars on real mortgages and real rent, real groceries, real fuel, and real baseball games.
There are plenty of useful things government can supply.
“When government borrows money to build a bridge, it pays real workers real dollars to build a real bridge that saves real commuters real minutes on their real commutes.”
That is a very DC-idealized version of a bridge.
In *real* DC world, many times the bridges are to nowhere (to coin a phrase, ahem) – with real tax dollars reallocated to real kickback contributors who give to real scummy politicians who use real money to really buy lots and lots of media ads to really bullsh*t enough people to get re-elected.
This is why everything government buys costs three times the free market price and serves one third the people – the balance disappears into the pockets of political insiders and the stupidity of ill-informed/sloppy/lazy central planners.
If infrastructure investments (perhaps one of the *least* objectionable government spending activities…why aren’t we talking farm, student loan, or ExIm subsidies here?…) were unerringly “productive” (in the sense that their GDP/social benefit outweighs their resource cost) then why hasn’t Japan’s 20 year long infrastructure orgy resurrected their growth?
Probably because the bridges really weren’t needed/economically sensible in the first place – they were make-work and political payoffs disguised as “public” investments.
They cost more than they generated, in aggregate.
Result = stagnant/sliding GDP.
And, as for teachers…cough, cough, COUGH!
You named your blog the “Law School Tuition Bubble” – and who/what blew that bubble if not corrupt law school administrators ruthlessly gaming a degenerate (literally, degenerate, as in the sense of ceasing to appropriately function) political system?
Are *continuing* efforts to endlessly expropriate the public (per various “repayment/nonpayment programs”) in the name of *greater* law school wealth a “stimulus”?
To me (and I thought to you) they look like a sewer of destructive corruption.
*Those* are the DC swamps that must be drained before pouring more money into the political system – where it will simply be stolen by the very same scum who have always masqueraded as champions of society.
And as for “negative real interest rates”…
With one hand of government (the Fed) printing money to blindly finance the other hand of government (the Executive fiscal authorities) I don’t think it is possible to say we have freely determined/accurate/economically efficient interest rates anymore.
We are all living in the Fed’s fictional universe – that’s why “interest rates” have collapsed even as the debt-to-GDP ratio has soared (Japan is a perfect example of this too).
But this is a result of ZIRP financial repression – not some triumph of government policy and the happy acceptance of savers.
So violated savers do what they *can* – they reduce their spending (in line with their reduced interest earnings) and drop the velocity of money like a rock.
Offsetting the government printing – with only a distributional transfer of spending power occurring, from the interest-starved private sector to the deficit-fatted government sector.
A person has to have a *lot* of faith in DC (despite the empirical evidence and the very structure of our Constitution) to think this is a happy long-term state of affairs.
So not one bridge in America reduces people’s commutes? As someone who grew up on the Mississippi River, my experience contradicts this.
Because its private sector debt levels were huge. You’re argument is like saying that watered-down antibiotics don’t cure the patient, therefore antibiotics don’t work at all.
And what did the workers do with the money they were paid? Did it vanish in a puff of logic?
You might not realize this, but most teachers don’t work at law schools. According to the BLS they tend to make $50,000-$55,000 annually. Real 1 percenters, those teachers. When Wall Street was crashing they sure kept their jobs.
Yes it is.
“So not one bridge”
Not sure how useful infrastructure justifies wasteful infrastructure.
When the Executive is spending Fed funny money (apparently – but only *apparently* – costless) insufficient care is taken in the determination of government priorities/projects.
As with the Clampetts (ahem), government spending money is largely “found” money. They haven’t had to earn it – so they don’t carefully value it.
“Three times the price…one-third the service”
I’ll do some more research while waiting – again – on two hour hold (not-kidding) for answers to Obamacare website f*ck-ups.
Of course, only the most important/DC scrutinized program in last 45 years…with 3.5 year (election friendly) lead time…
“watered-down antibiotics don’t cure the patient”
And Krugman says, “More Cowbell!”
There is no way to prove/disprove this argument other than from the smoking, post-Apocalyptic ruins of America.
*Any* level of “government stimulus” spending can be claimed to be “inadequate” if the economy doesn’t recover.
But it can also be because the stimulus is/was economically wasteful and counter-productive.
The Obama Administration’s own recovery projections have been shown to be way off – I’ll judge them on their own terms, requests, and specific promises.
“Disappear in a puff of logic?”
No, the recipients of government redistribution (from kick-backing union-shop hardhats to the fiscal courtiers of lobbying DC) in all likelihood spend the money (market for coke and hookers – booming!).
But…if there are behavioral implications for the recipients (more spending), why no behavioral implications for the ZIRP expropriated (less spending)?
That is what I mean when I refer to the distributional consequences/aggregate counter-productivity of the Keynesian approach.
“but most teachers don’t work at law schools. According to the BLS they tend to make $50,000-$55,000 annually. Real 1 percenters, those teachers.”
1) A very large fraction of educational spending goes to generally wasteful administrative overhead – not the claimed education function.
Largely this occurs in order to bolster the army of bought votes without causing absurdly low teacher-student ratios.
No one individual in the gamed educational system is as big a villain as any given Wall Streeter – but in aggregate the corrupted educational system does its own full measure of economic harm.
2) Teachers’ unions are one of the most powerful political factions in this country. Along with Federal/state government workers’ unions, they are the financial and organizational backbone of the Democratic party.
3) …which is one reason why the typical public sector teacher continues to have a contractually mandated 1500 hour work year – 25% less than other less-plugged in taxpayer slobs.
(It ain’t because the kids are out picking the harvest in the summer).
This translates teachers’ $55k per year into $37 per hour actually worked – or the equivalent of $74k per year for non-plugged in slobs.
A similar tax-avoidance scheme is at work for teachers’ unions supra-market benefits.
And that is before taking into account union-mandated-insurer kickback schemes such as those discovered in Wisconsin.
Or teachers’ defined-benefit pension funding nightmare.
Sure, $74k ain’t 1% money but it ain’t chickenfeed and it ain’t coming from a 2000 hour work year or a 40 year career.
In aggregate, these institutional abuses add up to tens of billions every single year – forever.
4) Teachers losing jobs – Hmmm…if you look at where most of the 2009 stimulus money actually went, you might agree that it might better have been called the “2009 Government Employee Exemption from Everybody Else’s Financial Reality Act”.
It bought teachers two or three years (then though sufficient) exemption from the Collapse.
They are hurting *now* but everybody else has been hurting two or three years *longer*.
So much for “shared sacrifice” or “community infrastructure” in actual DC practice.
When it comes to DC, don’t pay attention to the words – follow the money.
“…honest interest rates?”
“Yes it is.”
Yep, because nothing says “wake of greatest housing bust/misallocation of capital in US history” and “crippled labor market” like record low interest rates (obviously accurately taking possible default risks/non-biased funding sources into account…).
Not sure how very low mortgage rates disprove my point that Fed ZIRP’ing has created a wholly fictional risk environment by means of financial repression.
(“Here at Zimbabwe Ben’s Pawn we’ll buy anything you have! We print our own money! It never runs out!”)
Why do we need taxation at all?
Let the Fed’s Magical Mystery Money Machine carry the whole thing.
Public minded government spending?
Crab cakes, I say!
Or “How Maryland ‘somehow’ ended up with the highest percentage of millionaires in the country”
(sort data table at bottom)
I’m sure it had absolutely nothing to do with the courtier and bureaucrat infested environs of DC…
After all, crab cakes and residuals from “The Wire” turn a pretty penny…
New York? – Money spinning pikers!
California? – Land hustling hobos!
Texas? – Oil stained in-breds!
Crab-bucks reign supreme.
So if the Wabasha Street Bridge in St. Paul were built today instead of 2002 it wouldn’t shorten anyone’s commutes because it would be depression-era big-government Bernanke-money spending?
Nope, government crowding-out occurs when there’s full employment and rising inflation. Seeing no evidence of either.
Really, Fitch said the ARRA hastened the end of the recession. The CBO said it created 2-3 million jobs. So much for those teachers.
And what do hardhats, hookers, and coke-dealers do with the dollars? Burn them?
Repeat these words, “A dollar wasted is not a dollar destroyed. A dollar wasted is not a dollar destroyed. A dollar wasted is not a dollar destroyed. A dollar wasted is not a dollar destroyed…”
If the risk environment were “wholly fictitious,” then I’d expect mortgage rates to be random. They appear low, which is consistent with negative real rates, which is a fact. Indeed, I’m being generous because this “fiction” you refer to is unfalsifiable. If hyperinflationary doom isn’t here, it’s coming. When? Who can say, but it’ll happen.
Modern Monetary Theory works for me.
1) In Keynes/Krugman world, why not *pay* someone to *blow up* the Wabasha Street bridge (productive waste!) and then pay someone to invent a biofuel jetpack (ah, biofuel…) to ferry people across the bridge?
Or better yet, fund SETI to contact aliens to blow up the bridge (science “investment”).
Krugman gets his stimulative space invasion and we get jet packs.
(After all, the Left *loved* Bush’s war and the stimulative, redistributive results for Halliburton – “We Air-Conditioned Afghanistan”)
In the end, it goes to the quality of political spending judgment relative to the quality of private spending judgment.
Since politicians are by definition spending other people’s money/wealth, there is a moral hazard/fiduciary failure issue involved.
I’m sure you’ll come back with the private sector’s “failure of aggregate demand”, etc.
(Of course, goosing aggregate demand from 2002 to 2006 left us with more economically unsustainable “great houses” (McMansion division) than Downton Abbey…).
But, no mind, we can hire people to blow them up…
And around and around we’ll go.
2) Krugmanite Irrefutability/Cowbell Forever.
How can anyone determine if “true” “aggregate demand” is being exceeded if they refuse to see inflation/government induced economic chaos where it exists (home price “reflation” in the presence of stunted labor markets, ditto dramatic P/E expansion in stock market – 30% improvement in US fundamentals in last year?…or panicked bond market exit as taper-talking Fed funny money sloshes around from sector to sector?
Sure, equity speculators make out – Long T-bond holders…slaughtered.
If the past 10 years has taught us anything, there can be a *lot* of Fed-induced capital market chaos and real world capital mis-allocation caused by the Fed’s doomed efforts to make the US “competitive” with China/resurrect the US labor market by solely paper means.
All the interest rate manipulation since 2000 has brought us nowhere near the 1999 peak in 25-to-54 employment.
But it has led to 6 million completed foreclosures from 2007 to date.
3) Fitch pitching – I’m not too sure if rating agencies’ reputations have survived the 2008 collapse and the summer 2011 US downgrade wood-shedding…at this point the Fed may have bought them as well as everything else…
I’ll allow that the CBO cuts some more ice…but I think 3.2 trillion in new Fed funny money for 2 million jobs on the margin is a tad steep ($1.6 million per job – pre money multiplier – if my math is right).
4) “Waste is not destruction” aka The Iron Law of Politico-Keynesian Self-Justification.
While pointless/inefficient/corrupt political spending may successfully game government metrics…it also has real world distributional (and therefore knock-on consequences).
Fed ZIRP de facto redistributes “interest revenue” from private sector savers to government spenders (by dramatically dropping government’s debt servicing costs, almost irregardless of debt-to-GDP levels – see Japan. And I know, that is a feature not a bug among the MMT crowd).
But what long-term impact does that have upon the mindset/attitude of domestic savers, whose interests (literally and figuratively) have been traduced for over a decade?
The second (and I mean the *second*) that *any* reliable avenue away from US financial repression is discovered/invented, the dollar will self-destruct as a horde of ZIRP’ed dollar holders head for the exits.
They’ve been held hostage at the same interest rate movie for over a decade.
That is *exactly* why “Bitcoin is evil” in Krugman’s book (in a startling fit of honest, even-handed clarity K pinpoints the exact reason…it mitigates DC power to circumvent the market)
Personally, for all its internal cleverness, I don’t think Bitcoin will be the one to put the blade to the FedDollar.
My money (heh) is on some form of international oil-backed currency (really any currency secured by assets with real world utility – oil is simply the most internationally traded one currently).
Russia has been angling for this for a while and, post-Syria/Egypt, pissed off Gulf States also have the oil reserves to make *literal* PetroDollars a reality.
But the Fed’s financial repression (in the name of paper-led aggregate demand spiking) will have opened the door.
5) Hopping on board the Fed’s Magical Mystical Money Machine – Has any state, anywhere, ever, actually run itself off MMT entirely?
If the iron-clad confidence is really there, in the bowels of government, why not dispose of politically controversial taxation entirely and run the whole show via interest rate manipulations?
My guess is that a wholly MMT driven system would quickly reveal the “Truth that Dares Not Speak Its Name” – that interest rate manipulations are the *equivalent* of taxation.
(The exact point I make above when equating private saver interest losses to government interest cost reductions).
In either case (explicit taxation or interest rate manipulation) spending power/wealth is transferred from private actors to state actors.
But so long as MMT’ers don’t rub the public’s face in it (a full MMonTy), they can have *both* (explicit and implicit taxation).
Too bad the US Constitution (and entire concept of limited government) frowns on this sort of monetary fascism (“All your wealth are belong to US” – “your” Government).
We are far down an increasingly dangerous road in the name of an amorphous aggregate demand and in the service of a government too cowardly/corrupt to level with its people (“China is thoroughly kicking our competitive ass…go read a book…get a STEM degree…stop defrauding your students…become internationally competitive).
Btw, I’ll stop here and let you have the last word since we’ve both been down this circular driveway before.
And I much prefer agreeing *with you* with regard to law school bubble issues and discussing possible pathways to correct *that* more immediate, personally relevant mess.