Good News: Legal Services Industry Grew 2.0 Percent in 2015

Since I started writing here more than six years ago, it’s always been bad news for the legal services industry. Dwindling output, year in, year out. This time, no longer. We have growth: 2.0 percent in 2015.

gdp-and-legal-services-industry-value-added-1000s-chained-2009

(Source: Bureau of Economic Analysis (BEA))

And yes, thanks to an alert reader I can now show the BEA’s complete GDP-by-industry dataset going back to 1963! We can now see that if the legal services industry had maintained its mid-20th century growth rate it would be nearly double its current size. Imagine how much better law practice would be. You might think there’d be a need for more law schools to meet the demand.

Arguably, the government’s definition of the industry or its composition has changed over the decades as it has for other industries, but I doubt it. It’s mostly lawyers’ offices. Undeniably, though, the typical product of the legal services industry has changed. I’d bet that the weighted-average hour of legal work is very different now than in 1975. Even so, it’s still possible to give a dollar figure of how much stuff private practice lawyers are producing.

…And it ain’t much. The legal services industry produced less in 2015 than in 2012, 1995, and 1988. There’s room for a lot of growth. The sector peaked in 2008, and since then it’s shrunk more than 20 percent.

The other caveat is that the legal services industry’s growth this year is mostly attributable to the gross operating surplus (what goes to firm owners, partners, solos) as opposed to employee compensation, which better indicates budding demand for new lawyers. The breakdown is: gross operating surplus, +1.5 percent; taxes on production and imports, +0.5 percent; and compensation of employees, +0.0 percent.

Yeah. You read that right. 0.

However, compensation has shaved off growth since 2007, so maybe a zero year isn’t so bad. Here’s the chart of the industry’s components, which still only goes back to 1987:

components-of-legal-services-industry-real-value-added

Compensation of employees in the legal services industry peaked in 2003 at $121 billion (2009 $). Now it’s $97 billion, a similar 20 percent decline.

Finally, although the legal services sector did well in 2015, the rest of the economy did better: GDP grew 2.6 percent, of which 1.9 percent went to compensation of employees. Things still look better for non-law.

Finally, legal services as a share of household expenditures grew for the first time in thirteen years.

legal-services-share-of-household-consumption-expenditures

At its maximum, households spent $99.5 billion on lawyers in 2003. Now it’s $87.9 billion, down 11.7 percent.

I’ve written elsewhere that the legal services sector can’t shrink forever into nothing. It’s like estimates of the year Japan’s population reaches zero. So we were bound to have some good years. What we need is evidence of sustained growth, especially in employee compensation. Instead, that’s not going anywhere, but at least it’s not falling anymore.

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