Wednesday, April 1, 2015
Tuesday, March 31, 2015
The Absence of Evidence for Structural Change: Growth in Lawyer Employment and Earnings (Michael Simkovic)
There have been a lot of doom-and-gloom reports about layoffs and collapsing job opportunities for lawyers. As we’ve noted before, the relevant question for valuing legal education is the boost to earnings from the law degree across occupations, not the more specific question of what is happening to lawyers, or even more specifically, big law firms.
But for the sake of argument, focusing more narrowly on the under-inclusive category of lawyers only, what does the data actually show about lawyer employment? Are doom-and-gloom predictions justified for lawyers even if not for law degree holders? According to many of the proponents of the structural change hypothesis, signs of structural change were showing up as early as 2010, or perhaps even as early as 2008. We now have several years of historical data beyond that point to consider whether their predictions, thus far, have proven correct.
Lawyer employment is growing. This is true both in absolute numbers, and also relative to overall employment. In other words, lawyers are becoming a larger share of the U.S. workforce.
The data in the chart above is from the U.S. Department of Labor, Bureau of Labor Statistics (BLS), Occupation Employment Statistics (OES), which is a survey of establishments (employers). The blue columns scaled to the left axis represents the absolute number of lawyers, while the red line scaled to the right axis represents lawyers as a percentage of the total labor force. As can be seen from the above chart, both numbers are trending upward.
One limitations of BLS OES is that it focuses on employees, not owners, and therefore excludes law firm partners and solo practitioners. Another leading source of data, the U.S. Census Bureau’s Current Population Survey (CPS), is a survey of households, and includes solos and law firm partners.
CPS shows much the same trend as BLS OES. Lawyer employment is increasing, both in absolute terms and as a share of total employment. The charts below show CPS data.
The leading government data sources show the same thing—growth in employment of lawyers is faster than (or at least as fast as) overall employment growth.
The practice of law is also becoming more lucrative, at least over the long term. According to a recent draft paper by Richard Sander and E. Douglass Williams, after controlling for changes in the demographic composition of the legal profession, Sander and Williams find long-term growth in real (inflation-adjusted) lawyer earnings. (Sander and Williams use IPUMS-CPS data, and focus on white males, since historical data is not as readily available for women and minorities who have joined the legal profession in large numbers only in recent years; To understand the importance of controlling for demographic changes in the profession, consider Simpson’s Paradox).
Data from the Sander and Williams study is provided in the chart below.
After 2010, the picture for lawyer earnings is more mixed. BLS OES data suggests modest declines in real earnings of lawyers of around 6 percent by 2014. By contrast, the CPS suggests modest real growth in lawyer incomes of around 3 percent by 2014. Overall, it’s likely that real lawyer earnings have been close to flat. Flat earnings are consistent with what has been happening elsewhere in the labor market (see here and here). Given lawyers’ highly advantageous starting position relative to most other occupations, flat earnings or even modest declines suggest that lawyers have maintained a large relative advantage even as they have grown in relative numbers. (It’s possible that incomes for lawyers may have become more dispersed over time, notwithstanding the averages—indeed, it would be surprising if that were not the case, given the general trend toward widening income dispersion across the economy).
As noted previously, changes in entry level earnings and employment, though larger than those for the profession as a whole, are consistent with changes at the entry level for the rest of the labor market and established historical patterns. Young law graduates continue to earn substantially more than young bachelor’s degree holders post 2008.
Within a few years of graduation, about as large a proportion of employed young professional degree holders were working as lawyers after 2008 as before 2008.
Some critics of legal education have focused on “legal services” (mostly law firms). This is not a good measure of either the value of a law degree, or of the labor market for lawyers. Most employees in “legal services” are not lawyers, but rather support personnel such as secretaries, paralegals, and business and technology specialists. Many lawyers and law degree holders work outside law firms.
Changes taking place in “legal services” might be affecting the non-lawyers who work there rather than the lawyers. Changes in “legal services” affecting lawyers could be offset by changes affecting lawyers working in other industries. In other words, legal work could be moving out of the law firms and in house or into other professional service firms such as accounting firms.
BLS and CPS data for “lawyers” provides a much clearer picture of the legal employment market, while law earnings premiums across occupations are the most useful measure of the value of a law degree.
Growth in earnings and employment has been slower in recent years than in the past, to be sure, but that is generally true across the economy. The case for massive structural change in the legal profession eroding the value of a law degree is not well supported by the data.
Monday, March 30, 2015
Thursday, March 26, 2015
Some have claimed that deteriorating outcomes for recent law school graduates are a sign of permanent structural change in the legal industry and that these changes are reducing the value of legal education.
There are two important problems with this claim. First, the same changes are taking place across the labor market, and are not a law-specific problem. Indeed, the law degree has maintained its value relative to a bachelor’s degree. Second, entry-level employment and starting salaries are known to be volatile and cyclical, so large swings aren’t a sign of much of anything other than business as usual in a recession or boom.
The Economic Value of a Law Degree lacked data on those who graduated after 2008 because of limitations of the Survey of Income and Program Participation (SIPPP). Timing Law School supplements this data with additional information from the American Community Survey (ACS). Using ACS we look at young lawyers and young professional degree holders excluding those in medical occupations—two proxies for law graduates, one under inclusive, the other over inclusive. Both of these proxies (along with SIPP data) suggest that recent law graduates have maintained a large advantage relative to similar bachelor’s degree holders. The ACS data is presented below.
(A log earnings premium is similar to a percentage difference in earnings. A 0.6 log earnings premium means that young lawyers earn about 82 percent more than young bachelor's degree holders.)
What many in the press and some law professors mistook for a law-specific crisis was in fact a widely known phenomenon in labor economics—employment and salaries for inexperienced workers are more volatile and sensitive to economic cycles than employment and salaries for those with more experience.
Predicting structural change on the basis of established cyclical patterns is analogous to drawing conclusions about permanent climate change on the basis of temperature changes between summer and winter. Occasionally, the person making the prediction might get lucky and turn out to be right, but the evidence is weak, the analysis fails to test more plausible rival hypotheses, and the conclusion of permanent change is little more than a wild guess.
Climate Scientists are more careful than this. They use a back testing approach similar to the one Frank McIntyre and I use in Timing Law School. Back testing suggests that the prediction methods used to support the structural change hypothesis are baseless, at least with respect to such changes degrading the value of legal education.
Structural change can mean different things to different people. By structural change, some people may simply mean that subjectively, the practice of law feels different than it used to, not that law graduates are getting any less value for the money. Or they may mean more generally that the kind of work law graduates do is different, even if not relatively less well compensated. This softer, humanistic view of structural change may have merit, although once again, it may also reflect broader trends in the economy rather than law-specific issues.
Over the last two weeks I’ve discussed the case for structural change—Bureau of Labor Statistics projections, entry-level outcomes, etc.—and found little support for the hypothesis that the value of a law degree has permanently declined.
Next week I’ll discuss another pillar of the structural change argument—growth rates in the “legal services” industry.
Law schools and prospective law students may be paying more attention to employment outcomes shortly after graduation than this short-term data deserves. One potential use of the aggregate data about entry level employment and salaries is to assess whether now is a good or bad time to apply to law school. But fluctuations in employment outcomes for recent graduates do not predict fluctuations in employment outcomes 3 or 4 years in the future when those currently deciding whether to enroll would graduate.
Nevertheless, law students and the press pay close attention to the short-term outcome data. Starting salary data from the National Association for Law Placement (NALP) is covered by the press and is a good predictor of the number of law school applicants two years later (We assume one year lag for data collection and dissemination; one year lag to apply to law school).
Why are students responding to this data even though it does not predict their own short-term outcomes? And does the responsiveness of enrollment to short-term outcomes mean that law students care only about the short term?
Law students likely think more long term. If law students were so impatient that they only cared about one or a few years of earnings, it is doubtful that law students would have completed college, since college also makes sense only as a long-term investment. Indeed, students who were so focused on the short term might not even have finished high school. While temporal preferences can change over time, education appears to shift people toward thinking more long term. Aging from adolescence through the age of 30 is also associated with becoming more oriented toward the future.
Perhaps students are focused on the short term because they mistakenly believe that swings in short term outcomes predict more than they do. Students would not be alone in this error.
Some widely read back-of-the-envelope analyses started with initial salaries, assumed unrealistically low earnings growth along with high discount rates or an arbitrary payback period (lack of concern for the future) and reached the erroneous conclusion that going to law school does not make sense financially. (For a discussion see here; for examples of erroneous studies, see here and here )
Students may be focused on the short term because they mistakenly believe it predicts more than it does. Or they may focus on the short term because it is the only information that is readily available to them.
Legal educators and the press can and should make greater efforts to inform students of the long term as opposed to the short-term consequences of legal education. We should also shift the discussion away from raw outcomes and toward estimates of causation and value-added relative to the next best option.
This will be a challenge. Short-term raw outcome data is embedded in American Bar Association-required disclosures, in NALP’s data collection efforts and in the U.S. News rankings. Thinking in value-added terms requires us all to understand basic principles of causal inference and labor economics. But shifting toward long-term value added is ultimately the right thing to do if we are serious about providing students with meaningful disclosure and facilitating informed decision making.
This is not meant to justify indifference to the plight of young people who have suffered the misfortune of graduating into an unfavorable economic climate over the last several years. To help alleviate youth unemployment, we must understand that the cause of this misfortune is the macro-economy, not higher education. Education is an important part of the solution. Among those who are young and inexperienced, those with more education continue to do better in the labor market than those with less, and this difference appears to be largely caused by the differences in level of education.
Insurance programs like income-based repayment of student loans and flexible and extended repayment plans can help young people manage the unpredictable and uncontrollable risk that they might happen to graduate into a bad economy. If this insurance leads to more people pursuing higher education, earning higher incomes, and paying more taxes, it will benefit not only students and educators, but also the federal government and the broader economy.
Wednesday, March 25, 2015
Many legal educators believe that shrinking class sizes will help the students they do admit find higher paid work more easily and boost the value of legal education. They reason that if the supply of law graduates shrinks, then the market price law graduates can command should increase.
According to another hypothesis, now popular in the press, a decline in the number of law school applicants reflects the wisdom of the crowds. Students now realize that a law degree simply isn’t worth it, and smaller class sizes reflect a consensus prediction of worse outcomes for law graduates in the future.
Frank McIntyre and I investigated whether changes in law cohort size predict earnings premiums. Historically, they have not. Not for recent graduates, and not for law graduates overall. Nor have changes in cohort size predicted much of anything about the entry-level measures used by the National Association for Law Placement (NALP)—starting salary, initial employment, initial law firm employment.
How can both of these theories be wrong? One possibility is that they are both right, but the two effects offset each other. This seems unlikely however. If neither macroeconomic data nor Bureau of Labor Statistics (BLS) employment projections can predict law employment conditions at graduation, then how likely is it that recent college graduates with less information and less expertise could make a better prediction?
A more likely possibility is that there are other factors at play that prevent any strong predictions about the relationship between cohort size and outcomes / value added. For example, law schools may become less selective as cohort size shrinks and more selective as it increases. In addition, the resources available to law schools, and therefore the quality of education and training they are able to provide, may also change with cohort size. Since physical facilities expenses are not particularly variable in the ordinary course, most budgetary adjustments at law schools presumably take place with respect to personnel.
Anecdotally, many law schools appear to be managing the recent decline in enrollments by shrinking their faculties and administrations and using remaining personnel to teach classes and perform functions outside of their areas of expertise. Reduced specialization and a lack of economies of scale could affect the quality of service provided to students, offsetting any benefits to students from less competition at graduation.
Previous research in labor economics has found that resources per student are an important predictor of value added by college education, and that the use of adjuncts can lead to worse outcomes for students. (See here for a review)
Much of this is speculative—we do not yet understand why changes in cohort size do not predict law graduate outcomes, only that they do not predict outcomes. Given the historical data, it is probably not advisable to read too much into what the decline in law school enrollment means for students who will graduate over the next few years.
Instead, we should focus on the long-term historical data and the value of a law degree across economic cycles and enrollment levels.