Tuesday, July 18, 2017

Is California’s bar examination minimum passing score anti-competitive? (Michael Simkovic)

Occupational licensing regimes can help markets function when those markets suffer from what Economist George Akerlof coined a “lemons” problem.  In a lemons market, it is too costly or difficult for consumers to distinguish goods or services of acceptable quality from those that are close to worthless or even harmful.  Licensing regimes can help solve this problem by assuring consumers of a minimal baseline level of quality.  Effectively, licensing removes the bottom of the market, increasing quality, consumer confidence, volume, and price.

But economists worry that licensing regimes could be abused.  For example, if members of a licensed occupation were to seize control of licensing, they might set unnecessarily high barriers to entry for their industry, above what is optimal for consumer protection.  This could create an artificial shortage, reduce competition, drive up prices and drive down quality of services.  Political leaders also worry that excessive state or local licensing regimes could deprive workers of valuable economic opportunities and reduce their geographic mobility.

The deans of almost all ABA approved California law schools have jointly expressed concerns that California’s minimum passing score (‘cut score’) on the nationally uniform, multiple choice, Multi-State Bar Exam bar examination is excessively high. 

These leaders of legal education note that California has a higher cut score than any state except Delaware, no justification has been provided for this unusually high cut score, and some parts of California may have a shortage of lawyers.  Moreover, although law graduates from California score better on the MBE than the national average, they are less likely to pass the bar exam because of California’s unusually high cut score.  The case for bringing California’s cut score into line with those of other leading legal jurisdictions such as New York has been most forcefully stated by UC-Hastings Dean David Faigman. 

Amid concerns about possible anti-trust lawsuits against the State Bar, the Supreme Court of California has agreed to supervise the state bar of California and may set a lower bar cut score.

High cut scores are not the only signs of possible anti-competitive protectionism in California. California is among the few states that, without exception, forces experienced attorneys licensed in other states to sit for reexamination prior to relicensing. The overwhelming majority of jurisdictions—including New York, Washington D.C., Illinois, Texas, and Massachusetts—permit experienced lawyers who are licensed in another state to obtain a license to practice law on motion, without the need for reexamination.  (Some impose additional requirements, such as graduation from an ABA-approved law school or reciprocity by the state of origin).

Data from the U.S. Bureau of Labor Statistics, Occupational Employment Statistics[i] shows that California lawyers earn more, on average, than lawyers in any jurisdiction except Washington D.C. 


2016 BLS mean lawyer earnings by state

Top paying States for Lawyers:

State

Employment

Employment per thousand jobs

Location quotient[ii]

Hourly mean wage

Annual mean wage 

District of Columbia

31,470

44.81

10.16

$87.89

$182,810

California

76,840

4.81

1.09

$77.89

$162,010

New York

72,760

8.00

1.81

$77.53

$161,260

Massachusetts

17,440

5.04

1.14

$76.33

$158,760

Delaware

2,590

5.87

1.33

$75.77

$157,610

While this may be great for lawyers, it is not necessarily an unmitigated good.  It means that legal services likely cost clients more and may be less widely available. 

This could be for benign reasons, for example, because California lawyers provide a higher quality of service, or are concentrated in highly profitable areas of practice.  For example, the technology sector might create demand in sophisticated niche practice areas such as patents. 

On the other hand, high average wages could be a sign of barriers to entry and protectionism which restrict access to legal services.  For example, in most states, lawyers are an integral part of residential real estate closings and help advise clients on how to mitigate risks.  However, in California real estate closings are handled almost exclusively by non-lawyer real estate agents.  Real estate agents are compensated only when deals close, and have little incentive to raise red flags for buyers—and indeed, may lack the training to fully understand the risks.  Whereas real estate prices in New York and Boston are relatively steady, in Los Angeles and San Francisco, they are about as volatile as the stock market.

Outside of California, high wage-jurisdictions with sophisticated legal practices, such as New York and Washington D.C., attract a relatively large number of lawyers, as measured by the share of the workforce employed as lawyers and a BLS measure, the location quotient.ii

However, California has a substantially lower concentration of lawyers than these leading jurisdictions, and also trails jurisdictions like Illinois and Florida.  This pattern—persistently high prices of legal services and persistently low relative quantity of lawyers—is consistent with high barriers to entry.[iii]

These data are suggestive, and not conclusive. However, in combination with seemingly protectionist institutional features, they raise serious questions about California’s unusually strict requirements for entry into the legal profession.

Some have attempted to impugn the motives of law school deans, especially those who lead law schools with low bar passage rates.  But critics of the California bar exam cut score include the deans of Stanford, USC, Berkeley, UCLA, and UC-Irvine, whose graduates overwhelmingly pass the California bar examination on the first try. (see also here).  

The strongest substantive defense of a high bar cut-score may come from studies of the Connecticut Bar by Peter Siegelman and colleagues, which found that academic credentials and bar examination performance help predict subsequent discipline of attorneys (here and here). 

But Siegelman and colleagues found that the baseline rate of discipline was so low to begin with that excluding more individuals from the legal profession would provide very limited benefits to clients.  They noted that lawyers at greater risk of passing the bar exam might have greater rates of discipline because they are more likely to work in small or solo practices where discipline is more common.

 

[i] BLS OES data excludes law firm partners and solo practitioners.

[ii] The location quotient is the ratio of the area concentration of occupational employment to the national average concentration. A location quotient greater than one indicates the occupation has a higher share of employment than average, and a location quotient less than one indicates the occupation is less prevalent in the area than average.

[iii] Legal education is notably not a barrier to entry in California, which permits graduates of non-ABA approved law schools or college graduates who have apprenticed with a lawyer but have not completed law school to sit for the bar examination.

 

UPDATE: July 26, 2017.  Derek Muller and Rob Anderson posted a working paper to SSRN that sought to replicate much of Siegelman & colleague's analysis using California data.  Compared to Connecticut California makes less granular data available to researchers, and so Muller and Anderson relied on law school attended as a proxy for bar exam performance.  Although the California results are similar--relatively few lawyers are disciplined in any given year--Muller and Anderson argue that the probability of being disciplined at least once over the course of a 40 year career might still be reasonably high for some lawyers.  This raises the question of whether clients would materially suffer from being served by a lawyer who was disciplined once many years ago or might be disciplined once in the distant future, as opposed to one who was recently in trouble with the bar.  

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Guest Blogger: Michael Simkovic, Legal Profession, Of Academic Interest | Permalink