A while back I reported on the BEA’s comprehensive revision to its GDP-by-industry accounts that overhauled the data on the legal sector’s output. Unfortunately, the new figures only go back to 1997 and it’s unclear when the BEA will update the data from prior years. Although I seriously doubt the comprehensive revision will significantly alter the pre-1997 numbers—and my arguments that are based on them—it’s an annoyance that the GDP-by-industry data can’t be cited without a caveat.
One thing I did find recently, however, is that the BEA tracks household consumption of legal services, and while the dataset doesn’t cover the entire private legal sector, it does go all the way back to 1959. Household legal sector purchases resemble the legal sector itself before the comprehensive revision: explosive growth in the 1980s, stagnation in the 1990s, a brief peak in the mid-2000s, and then deterioration.
I’ve labeled some noteworthy peak and trough years for real household consumption of legal services and the corresponding levels of total household consumption.
(Source: BEA NIPA Tables 2.5.x, author’s calculations)
In 2012, households consumed less in private legal services than they did in 1988. If you divide this series on a per capita or per household basis, the true peak was probably 1990.
I believe this tends to support my hypothesis that demand for legal services is income and wealth elastic, and with more households at stagnant or lower income levels, they can’t afford to hire lawyers at a price that can sustain small practices. Nowadays, the current-dollar share of household consumption of legal services to total household consumption expenditures is 0.86 percent. In 1990 it was 1.09 percent. If that ratio had held, then today households would be consuming $119 billion rather than $94 billion in legal services.
The only alternative hypothesis is if since the early 1990s households have been substituting legal services with services from another sector, or if they’ve been executing most routine legal tasks themselves. Either way, unless households begin to consume more legal services, I don’t see any way for the legal sector to recover.
Think about that the next time you hear someone say that now is the best time to apply to law school.