June 16, 2015
So how should our understanding of student loans apply to law students? Mortgages are routinely repaid over 30-years, even though owner-occupied housing is close to pure consumption (most of the value of housing is consumed as imputed rental income, with appreciation averaging only around 1 percent above inflation). Legal education typically provides a much higher rate of return than real estate, and is probably closer to investment than consumption.
Rather than focus on initial salaries at graduation alongside student loan balances, it would be more appropriate to emphasize student loan debt service payments, assuming students pay their loans over several decades and with payments that match the expected trajectory of earnings. This would be an apples-to-apples comparison—initial cash flows compared to initial cash flows.*
It also makes sense to report student loan payments in real terms by subtracting expected inflation (typically around 3 percent) from the nominal interest rate before calculating loan payments.** (As inflation increases wages and the prices of goods and services, a nominally flat debt payment becomes less valuable in terms of what the money can buy and how much work is necessary to earn enough to make the payment). Adjusting for inflation won’t take into account the increase in real earnings (above and beyond inflation) that typically comes with additional work experience and secular increases in economy-wide productivity, but at least takes into account increases in earnings that match inflation.
$100,000 in debt repaid in equal installments monthly over 30 years at a 3 percent real interest rate (6 percent nominal) comes to $5,059 per year ($422 per month) in real terms. In nominal terms (without adjusting for the power of inflation to make debts easier to repay), the payments are $7,200 per year ($600 per month).
With a graduated extended repayment plan over 25 years, the real initial monthly payments come to $3,420 per year ($285 per month). In nominal terms (without adjusting for the power of inflation to make debts easier to repay), the initial payment is around $6,000 per year or $500 per month.
Law graduates typically earn around $60,000 to $75,000 per year to start and have debt service payments of around $3,400 to $7,200 per year. Recent law graduates have much more cash at their disposal than most bachelor’s degree holders of a similar age even after paying down their loans.
Law students’ incomes can support their debt service payments, as demonstrated by the exceedingly low student loan default rates for recent law graduates. It is time for the ABA to rethink how law schools disclose debt balances and student loan repayment obligations so that students are not mislead into underinvesting in education.
Journalists and education experts should also be careful to discuss student loans using apples-to-apples comparison—cash flows to cash flows, and lifetime present values to lifetime present values.
* If student loan balances or initial cost of education are presented, these should be compared to the expected present value of the boost to earnings from the degree over the course of a lifetime. Thus, for example, whenever reporting that law school costs around $100,000 on average, it should also be reported that the average value before taxes and tuition is around $1,000,000 and that the median value is around $750,000.
** Part of what graduated loan repayments accomplishes is to make real payments closer to level. If nominal payments remain flat, as in standard fixed repayment loans, in real terms, payments decline over time and repayment of the loan is front-loaded.
Tom Friedman's latest New York Times column uses the labor market for executive assistants and executive secretaries to illustrate dubious claims about credentialing and over-education. Friedman argues that since most current executive assistants and executive secretaries don't have bachelor's degrees, employers should not try to upgrade the workforce by hiring new executive assistants and secretaries with bachelor's degrees. After all, executive assistants without bachelor's degrees can do the job, so who needs a bachelor's degree?
The problems with this reasoning should be obvious.
First, education is only one of many factors that are valued in the labor market. Some individuals who are smart, hardworking, personable, physically attractive, or fortunate, but have limited education, will inevitably be as successful or more successful than other individuals who are highly educated but less gifted in other respects. This does not in any way challenge the extremely strong evidence that a bachelor's degree can improve labor market outcomes. It simply means that we are dealing with a heterogeneous population.
If two homogenous groups who were initially equally strong on non-education factors were given different amounts of education, the more educated group would typically be more successful in the labor market. Labor economists who have studied identical twins routinely find that twins with more education are more successful than their less educated counterparts. When labor economists control for unobserved heterogeneity within education levels using fixed effects models rather than OLS regression, "over-education" effects on earnings diminish or disappear. In other words, highly educated folks who are about as successful as those with less education--and end up in the same occupations as the less educated--tend to be weak on factors other than level of education. But even within occupations that combine the worst of the more-educated with the best of the less-educated, those who are more educated still tend to earn more. Since profit-maximizing employers are not in the habit of handing out money for nothing, this suggests that the more educated are better at their jobs.
In sum, education many not always be enough to make you more successful than your neighbor or coworker, but it can make you more successful than a less educated version of yourself.
Second, the fact that something was "good enough" at some point in the past does not mean it is good enough today. Rising standards typically involve both increases in quality and commensurate increases in cost. In inflation adjusted terms, the average new car today costs about 10 times as much as a Ford Model-T in the late 1920s. But the average new car is faster, safer, more reliable, and easier to operate. Similarly, as education increases, so does the productivity of labor and the cost of labor--wages or earnings. Highly educated workers today are far more productive than their counterparts decades ago, and as a result, they earn more.
It is interesting that Friedman chose executive assistants and executive secretaries--a field where most workers have less than a bachelor's degree--as an example of supposed "over-education." According to the Bureau of Labor Statistics Occupational Employment Statistics, employment of executive assistants and executive secretaries is collapsing. Employment fell by more than half between 2007 and 2014, from over 1,500,000 workers to barely more than 700,000. In other words, the level of education that most executive assistants and secretaries had in 2007 was not enough to make it in the labor market of 2014.
Among secretaries, those with higher levels of education still earn more than their less educated counterparts after controlling for race. Employer hiring priorities cited by Friedman suggest that those who are more educated are more likely to keep their jobs or find new ones.
This is consistent with general trends in the labor market. Low and middle skill workers with limited educations are the hardest hit by automation, outsourcing and layoffs, while their more educated counterparts are navigating the recession and changes in the labor market more successfully. (During the 2007-2014 period, employment of a group of highly educated workers, lawyers--supposedly the victims of job-destroying structural change--continued to grow faster than overall employment).
For another angle on Friedman's column, readers may be interested in Frank Pasquale's critique. Pasquale discusses apparent bias in the New York Times' Higher Education coverage and argues that as newspapers struggle to adapt to a world replete with free online content and greater competition for advertising dollars, business priorities may be overriding traditional news values. Given the nearly 20 percent decline in employment for reporters and correspondents between 2007 and 2014, journalism does appear to be under serious financial pressure.
May 10, 2015
Competitive Scholarships, Mandatory Courses, and the Costs and Benefits of Disclosure (Michael Simkovic)
There is a wide range of views about the benefits, costs, and appropriate use of conditional merit scholarships—scholarships that under their terms, will only be retained after the first year of law school if students maintain a minimum GPA or minimum class rank (if there is a mandatory grading curve, a minimum GPA effectively is a class rank requirement). These questions implicate both broad value judgments and also very specific empirical questions to which we many not have clear answers.
1) Is competition for grades a help or a hindrance to learning?
2) Is competition, with greater rewards for winners than for losers, inherently moral or immoral?
- Does the answer depend on whether the outcome of the competition is driven by luck, skill, or effort?
- Does the answer depend on how large the differences in rewards are between winners and losers?
3) Does disclosure alter student decision-making?
- If so, how?
- Is this a good thing or a bad thing?
- If it is a good thing do the benefits of disclosure outweigh the costs of providing disclosure?
- Are some ways of providing disclosure clearer and more meaningful than others? Could too much disclosure be overwhelming?
Disclosures are sometimes very effective at improving market efficiency. Sometimes disclosures appear to have no effect. Sometimes they have the opposite of the intended or expected effect. For example, disclosure of compensation of high level corporate executives of publicly traded companies may have contributed to an increase in executive pay (see also here.)
In the case of conditional merit scholarships, the direct administrative costs of providing disclosure appear minimal. The effects of such disclosure, if any, remain unknown. I support access to greater information about conditional scholarship retention rates, not only for law schools but also for all educational institutions.
Scholarship retention rates at many undergraduate institutions under government-backed programs appear to be lower than scholarship retention rates at most law schools. Around half of Georgia Hope Scholarship recipients lost their scholarship after the first year. Around 25 to 30 percent of Georgia Hope Scholarship recipients retained their scholarships for all four years of college. Nevertheless, conditional merit scholarships can have positive effects on undergraduate enrollment and academic performance. A fascinating randomized experiment by Angrist, Lang and Oreopolous found that financial incentives improved grades for women but not for men. A recent experiment also found evidence that merit scholarships tied to grades can increase student effort and academic performance at community colleges.
Unfortunately, there is some evidence that the use of merit scholarships tied to GPA by undergraduate institutions—where grade distributions and course workload vary widely by major—can reduce the likelihood that students complete their studies in science technology engineering and math (STEM) fields. Students who major in STEM fields have a higher chance of losing their scholarships
In other words, if students can shop for “easy As” rather than study harder to improve their performance, they can reduce their own future earning prospects. The approach law schools take—merit scholarships tied to mandatory grading curves and a required curriculum—may be better for students in the long run. Indeed, law students might benefit financially if additional courses, such as instruction in financial literacy, were mandatory.*
Greater disclosure of grading distributions may exacerbate grade shopping and grade inflation, which can undermine student effort and learning. Some models suggest that grade inflation is contagious across institutions (see also here). (It should be possible to disclose scholarship retention rates without disclosing grade distributions).
In some contexts, such as securities regulation or pharmaceuticals, disclosure requirements tend to be high. In other areas, such as employment contracts, disclosure tends to be more limited. We may not always get the balance right. These questions have lead to a rich research literature in law, economics, and psychology (see Bainbridge, Lang, Mathios, Coffee, Kaplow, Easterbrook and Fischel, Romano, and Schwartz). In all cases, whether and how disclosures alter behavior is an empirical question. How the benefits compare to the costs are empirical questions mixed with subjective value judgments.
Given the current limited state of knowledge, and good faith and understandable disagreements about subjective value differences, strident views on one side or another, and moral condemnations of those entertaining different viewpoints, are not appropriate.
Law professors have an obligation to teach students to think like lawyers, weigh evidence, and consider different arguments and different perspectives. We should not shut down discussion with swaggering declarations of the moral superiority of our own views or ad-hominem attacks against those with whom we disagree.
A recent post (in the comments) by Brian Tamanaha (or someone posting under his name and with a similar rhetorical style**) highlights the unfortunate tendency by some toward moral posturing. Tamanaha writes:
“[Those who condemn conditional scholarships are] speaking up for the integrity of legal academia. It is embarrassing that law professors would now rise up to defend employment reporting standards … criticized by outsiders (see New York Times "Bait and Switch" piece), practices which have since been repudiated and reformed by new ABA standards. I do not understand why Simkovic is re-raising these resolved issues, but it does not help us regain our collective credibility.
After reading these posts, I have begun to wonder whether a sense of professional responsibility is what separates the two sides in this discussion. It is not a coincidence that John Steele, [Bernard Burk], and others who strongly condemn these practices have taught legal ethics.”
In other words, if you question Brian Tamanaha’s reasoning and conclusions—as I have—then you have no integrity and dubious ethics, are irresponsible and unprofessional, and are an embarrassment to the legal academy.
Bernard Burk, though declaring his disdain for ad-hominem attacks, accuses those with whom he disagrees of being “partisan.” He compares competition for grades and scholarships to physically beating students. Burk compares law schools to gangsters and evil witches. He claims that the positive effects of conditional scholarships on student motivation and learning “smells of post-hoc rationalization.” (Most of the labor economics studies demonstrating positive effects of financial incentives on student performance were available before The New York Times and the law school critics targeted law school conditional scholarships; the critics overlooked the peer-reviewed literature).
Deborah Merritt, though generally providing an intelligent discussion of conditional scholarship issues, compares conditional scholarships in which adults who lose the competition for grades receive a free year of law school to the fictional “Hunger Games” in which children who lose a physical struggle are murdered. (Paul Caron repeats this unfortunate comparison when summarizing the debate; so does Bernard Burk).
Paul Campos compares those who disagree with him about data disclosure standards to “Holocaust deniers.”
Law school critics have not persisted through the force of argument or evidence, but rather through their ability to make an honest discussion of the issues so unpleasant that very few who disagree with them wish to engage. We should thank Professor Telman for his courage and for elevating the conversation from polemics to evidence-based inquiry. As more professors and journalists raise substantive questions about law school critics’ narrative, it will become increasingly difficult for the critics to foreclose factual and ethical inquiry through ad-hominem attacks and hyperbole.
* A recent survey by John Coates, Jessie Fried, and Kathryn Spier at Harvard suggests that large law firm employers believe instruction in certain technically challenging business electives, especially accounting, corporate finance, and corporations, is particularly valuable on the job. Data does not exist to evaluate whether enrollment in such courses actually boosts earnings or employment, or is even correlated with greater earnings or employment. However, one working hypothesis is that such courses might be the law school equivalent of undergraduate STEM or economics majors. A study of high school financial literacy mandates suggests positive long-term effects on enrollees’ financial well-being.
** The first and only time I met Brian Tamanaha in person was at the 2013 Law & Society meeting in Boston where he spoke on a panel. Professor Tamanaha shut down questions from the audience about whether his presentation of law school data was misleading by insisting that in our hearts surely we all knew he was right and that any question about whether he was wrong on the facts, and any attempt to rely on data rather than emotionally charged anecdotes, was a sign of flawed moral character.
May 10, 2015 in Guest Blogger: Michael Simkovic, Law in Cyberspace, Legal Profession, Ludicrous Hyperbole Watch, Of Academic Interest, Professional Advice, Science, Student Advice, Web/Tech, Weblogs | Permalink
May 07, 2015
One question in the labor economics literature is why education increases earnings. The dominant view is Human Capital Theory—education increases earnings by increasing productivity of educated workers. A minority view, signaling theory, holds that education increases earnings by revealing information about potential employees to employers and facilitating the employer-employee matching process, similar to marketing expenditures matching products with customers. In other words, education indicates to employers which employees were the best all along.
On some level, the distinction is irrelevant—from the perspective of potential students it does not really matter how education increases earnings, only that it does. Whether education makes workers more efficient individually or makes the economy in aggregate more efficient by moving workers to where they can do the most good does not change the fact that employers, employees, and the economy as a whole are better off with additional education as long as the marginal benefits of additional education exceed marginal costs.
Critics of higher education sometimes claim that there is over-investment in signaling and credentialing, a kind of arms race producing negative externalities in which the social returns to education are lower than the private returns. This view, though popular with political movements seeking to reduce public support for education, does not hold much sway in the modern peer-reviewed labor economics literature.
A recent literature review by Professors Fabian Lange at Yale and Robert Topel at the University of Chicago explains the problems with the view that employers would expend valuable resources paying a premium for employees who had over-invested in education as a signal of ability: “Employer learning about productivity occurs fairly quickly after labor market entry, implying that the signaling effects of schooling are small.”
In other words, employers can quickly and efficiently sort employees on their own by observing their productivity on the job, retaining and promoting strong performers, and terminating weaker employees. Employers do not need educational institutions to perform this task for them, nor are employers willing to pay premium wages for information they can more cheaply obtain themselves.
Suppose, for example, that the only value of a Harvard Law degree were as signal of ability to employers. Harvard admits students based almost exclusively on standardized test scores and undergraduate grades, which are also observable to employers. Almost everyone who is admitted to Harvard graduates.
A clever employer realizes it can save money by employing bachelor’s degree holders with admissions letters from Harvard, but who have not yet attended. Harvard gets wise and refuses to confirm admissions. Employers now look directly at LSATs and GPAs, and perhaps hire former admissions officers to consider softer factors. The employer and employee can effectively split the cost savings of not getting the Harvard degree and also the value of the time that would be spent in schooling instead of working.* If additional information is required, personality testing, assessments of physical and mental health, assessments of writing samples, background checks and the like can all be performed for a fraction of the cost and in a fraction of the time as a Harvard degree.
In spite of potentially massive efficiency gains and financial reward for employers and employees, this is not what actually happens in the real world (with the exception of a stacked "experiment" by Peter Thiel). Why not? Because employers believe that the schooling itself is valuable and makes employees more productive.
Lange and Topel also explain how “sheepskin effects” (disproportionately higher earnings premiums for college completers than for college dropouts with a few years of college) have been misinterpreted as support for the signaling hypothesis, when they actually reflect selection effects and dynamic decision making about educational investments:
"Diploma effects are often presented as evidence for screening theories of schooling. We disagree. Instead we view diploma effects as evidence that individuals face uncertainty about their individual returns to schooling and that this uncertainty is revealed as individuals acquire schooling. Those least capable to profit from schooling drop out before the completion of degree years. Those graduating exhibit larger returns than those who dropped out at lower levels of schooling. This reasoning was informally developed by Chiswick (1973). Since then, a number of authors (Altonji (1993), Heckman, Lochner and Todd (2003), Keane and Wolpin (1997) and Eckstein and Wolpin (1999)) examined different aspects of sequential schooling choice under uncertainty. We build a simple model in this spirit with the intention to show how individual’s schooling decisions can generate (large) diploma effects if individuals learn about their returns while in school."
There are additional problems with signaling theory, which I explained in Risk Based Student Loans:
“Signaling Theory implies that labor market outcomes should not depend on what students study, but only on how well they perform academically relative to other students with similar standardized test scores, or perhaps whether they demonstrate a strong work ethic by choosing a challenging major. Differences in earnings by field of study appear to reflect the value of field-specific skill development rather than differences in ability levels. Even within engineering, there are large starting wage differences by specialty.
Human Capital Theory also helps explain higher average per-capita productivity and wages in states and nations with higher levels of educational attainment. If education only sorted workers according to ability, it would presumably only increase the variance of wages (i.e., income inequality), while leaving the mean unaltered.
Further, Human Capital Theory helps explain the willingness of many employers to pay for professional degree programs for successful employees. Employers’ willingness to educate workers whom employers already know to be of high quality suggests that employers believe that professional education has skill-development value rather than mere sorting value.”
In The Knowledge Tax I expand on this, explaining the evidence linking investment in education to more rapid economic growth rather than merely redistributing income from the less educated to the more educated.
* Note that in many states, including New York and California which collectively comprise 28 percent of the law market, a law degree is not legally required to sit for the bar exam. Instead, “law office study”, or an apprenticeship under the supervision of an attorney, possibly following one year of law school, will suffice.
May 05, 2015
A better grading system
Professor Merritt argues that mandatory grading curves can be unfair when one class has stronger students than another. I agree.
Statistician Valen Johnson—whom I cite in my last post as an authority on grade inflation— has developed a clever solution to this problem which involves adjusting grading curves within each class based on the ability levels of the students. A Johnson-inspired proposal was nearly adopted at Duke University in the late 1990s, but was blocked by departments that offered higher grades and attracted weaker students.
Most law schools try to balance their sections in term of student ability levels and overall quality of faculty. Nevertheless, anomalies like a “smart section” (as Professor Merritt calls it) may occasionally occur. Johnson’s proposal would be an excellent solution to this problem.
Professor Merritt asserts that there is some sort of problem with the market for lawyers and law graduates that makes competition and inequality uniquely bad in the context of law. These assertions are implausible given the low barriers to entry for both law schools and lawyers, aggressive competition between law schools for students and between lawyers for clients, and widespread inequality outside of law school and legal practice. Some form of regulation is the norm in many areas of employment and in many industries, and a licensing regime for lawyers and an accreditation system for law schools do not in any way make these occupations and institutions unique or unusual. According to a recent study, nearly a third of U.S. workers are licensed, licensing is more common as education and skill levels increase, and licensing does not affect inequality among the licensed.
As a general matter, deregulated market competition and greater inequality are a package deal. Inequality can be reduced through regulation, taxation, and politicization of compensation through unionization or growth of public sector employment.
Professor Merritt’s critiques follow the standard playbook of law school critics—take something about law schools that is widespread and common out of context, claim that it is somehow unique to law schools when it is neither unique nor unusual, and then demonize it.
Jeremy Telman responds.
In her latest post, Deborah Merritt maintains that scholarships conditioned on maintaining a minimum GPA or class ranking are troubling when used by law schools, even though such conditions are routinely used by other educational institutions and state government programs.
According to Professor Merritt, the problem is that the mandatory curve in law school is such that not all students can keep their conditional scholarships. But Professor Merritt presents no evidence that conditional scholarships retention rates are any higher for undergraduate or government programs than for law schools. She infers nefarious motives on the part of law schools based only on the fact that law schools require students to compete for scholarship funds that are in limited supply.
Perhaps Professor Merritt believes that competition for scarce and valuable resources is inherently immoral. She does not explain why this is so or whether these views apply outside the context of law school scholarships. If only one out of ten associates hired at a law firm will make partner and earn $1 million per year, is it inherently immoral to ask associates to work hard and compete for the opportunity? If only one actor will be selected for a part, is it immoral to ask more than one actor to try out? Is any competition for promotions, clients, or recognition immoral? If so, we are living in a wicked, wicked world.
Perhaps Professor Merritt believes it is inherently immoral to limit “A” grades to students whose academic performance is superior to most of their peers, since an “A” is simply a data point and can be replicated and distributed to everyone at zero marginal cost. But liberally handing out “A” grades is costly for students and employers. Labor economics studies suggest that grade inflation is associated with reduced effort by students and reduced learning. Educators are not doing students or employers favors if they allow high grades to become a birthright rather than a marker of distinction that must be earned through hard work and exceptional performance.
Statistician Valen Johnson and others have argued that many perverse incentives in undergraduate education could be ameliorated if mandatory grading curves were imposed across majors and grade inflation and grade shopping were stamped out. If certain undergraduate majors have succumbed to the pressure to inflate grades in order to keep student-customers happy, that is quite troubling. Employers will likely distrust grades from such programs, question how much students have learned, and harbor suspicions about the work ethic of students who would opt into programs known for awarding easy “A’s” for minimal effort. Programs that have resisted the pressure to inflate grades and maintained more rigorous academic standards are more likely to retain the confidence of employers and to teach students knowledge and skills that are valued in the labor market. Indeed, grades are notoriously lower in STEM fields than in the humanities, even though STEM majors spend more time studying and have higher standardized test scores.
Professor Merritt suggests that law students do not require any incentives to work harder, since they are all already studying at full capacity. Some students presumably are, but there are many law students who can and should focus more on their studies. A roll call in most classes will reveal students whose attendance is well below 100 percent—so much so that the ABA now requires law schools to enforce minimum class attendance policies. When students do attend class, a visit to the back of a classroom and a glance at computer screens will reveal some students who are not giving their undivided attention. Cold calling will reveal students who have not done the required reading—although they do appear to be well informed about the latest sports and celebrity news. Some students have family or employment obligations that understandably limit the amount of time they can devote to their studies. But in the evening, while some student who are less constrained are studying, a stroll past the local bar will reveal others who are spending their time on less academic pursuits.
Shortly after graduation, some students who did not show up for class enough, did not pay attention enough, did not prepare for class enough, did not review after class enough, and did not seek out their professors when they were confused will find that they have not passed the bar exam and will not be permitted to practice law until they learn how to work hard and study. Others will find, rather less dramatically, that what they did not work hard enough to learn in law school could have made them more valuable to their employers.
Law schools can observe LSAT scores and undergraduate GPAs, but they cannot directly observe students’ work ethic and drive to succeed. Just as law students want to attend the best law schools, law schools want to educate the best students who have the motivation to become leaders in law, business, and government.
Given the goal of attracting and retaining the best students, rewarding motivation and ability seems like a reasonable policy. Anecdotes notwithstanding, the evidence suggests that most college and law students understand the terms of conditional scholarships well.
May 04, 2015
Many critics have attacked law schools for offering merit scholarships that can only be retained if students meet minimum GPA requirements. Jeremy Telman has a fascinating new post analyzing these scholarships in light of common practices in higher education and the peer-reviewed social science literature. It’s a powerful counterpoint to a previously unanswered critique of law school ethics.
Professor Telman notes that similar conditional scholarships are widely used by undergraduate institutions, and even some state government programs. Undergraduates behave as if they understand how conditional scholarships work, which suggests that most law students, who are older, wiser, and more sophisticated, probably understand the terms of these agreements as well.
Moreover, minimum GPA requirements can motivate students to study harder, pay closer attention, and learn more. This seems particularly likely in the context of the first year of law school where mandatory grading curves and required curriculums remove the opportunity to shop for “easy A’s”. (Professor Telman does, however, express concern about inadequate performance feedback to law students until the final exams at the end of their first semester).
Professor Telman notes that law schools may struggle to predict at the time of admission which students will be the most successful. Conditional scholarships help institutions gather additional information about students’ abilities and work ethic and ensure that limited merit scholarship resources go to the students who are most deserving. Students who are deemed undeserving and lose their scholarships retain the option of transferring to another institution for their remaining years of law school.
Professor Telman doesn't object to additional disclosure about the percent of students retaining their scholarships, but he doubts it would have made much of a difference in prospective law students' matriculation decisions.
April 29, 2015
A number of critics have argued against extrapolation from Professor Merritt’s study of the Ohio legal market to the national legal market. In her response, Professor Merritt makes some good points, and also several key points with which I disagree.
Professor Merritt suggests that an important contribution of her study is providing up-to-date information about national legal employment through the prism of Ohio. However, there is no shortage of up-to-date data that can provide a more accurate picture of national trends than a study specifically focused on Ohio.* The primary value of Professor Merritt’s study is as an isolated snapshot of a single cohort in Ohio at a particular point in time. Without additional information, it is hard to know how much, if at all, Professor Merritt’s findings should be generalized to other legal markets or other time periods.
There is no reason to believe that the single Ohio cohort tracked by Professor Merritt will better predict outcomes for those currently enrolling in law school than a national cohort. The single Ohio cohort will likely be less predictive than a long-term national average across multiple cohorts. Indeed, as Professor Merritt acknowledges, her study is not a study of going to law school in Ohio because of selection issues from law graduates leaving for larger markets, coming to Ohio from other markets, and from non-bar passage. **
Year-to-year changes in employment, earnings, and economic growth can vary widely from state to state. Absent evidence of a history of correlated economic activity, a single state should not be used as a proxy for the U.S. as a whole or for other states.
There is no reason to believe that the trajectory of Ohio’s legal market from year to year will closely track national trends, particularly when the national legal market is heavily concentrated elsewhere. Washington D.C. and the top 5 states by size of legal market*** collectively account for more than half of the national legal market.
If Professor Merritt wishes to use Ohio as a proxy for the rest of the U.S., then she should supply evidence that Ohio tracks national trends, and she should compare Ohio to Ohio at different points in time and Ohio to the U.S. at the same point in time.
Second, Professor Merritt suggests that focusing on Ohio is just as reasonable as focusing on New York or California. New York and California collectively constitute 28 percent of the national legal market.*** Ohio constitutes 2.5 percent of the national legal market. Moreover, the New York legal market is unusually large relative to the New York economy, while Ohio has a legal market that is small relative to its economy.
Third, Professor Merritt suggests that Ohio can be made nationally representative by deflating salaries elsewhere by cost of living differences. Cost of living differences are not the reason corporations—who can send legal work anywhere— pay a premium for lawyers in the major legal markets such as New York, D.C., Los Angeles, Boston and Houston. Rather, corporate clients believe that differences in quality of work justify higher billing rates for important matters. New York, D.C. and other high-paying markets are importers of top legal talent from across the country.
Differences in costs of living are not random, but rather reflect real differences in quality. Cost of living indexes often focus on quantitative rather than qualitative factors. For example, a restaurant meal in Manhattan may cost more than a restaurant meal in Buffalo, but the quality of the experience in the restaurant in Manhattan will on average be higher because the high prices restaurants in Manhattan can charge will attract the most talented restaurateurs. Similarly, there may be differences in the quality of healthcare, legal services, education, policing, parks and recreation, environmental safety, transit, housing and other factors. Money attracts talent. Some amenities or opportunities may only be available in particular locations, and people are willing to pay for proximity to consumption, employment, and social opportunities.
Many costs are not local, but rather national. These include automobiles, items ordered online, higher education at major universities, and investments (stocks, bonds, etc.). For law school graduates—who will typically be able to earn far more than they consume in a given year—it is financially better to work where both income and costs are proportionately higher because this will maximize the dollar value of savings. Law graduates can always retire to a lower-cost location later in life if they wish.
One quantitative measure for differences in quality of life is differences in life expectancy.**** High cost, high income, high infrastructure states like New York, Connecticut, and Massachusetts generally rank well on this measure, while lower cost, lower income states rank less well. This pattern can also be seen internationally and individually—higher income and higher life expectancy are correlated.*****
There will indeed be some lucky individuals who find low-cost locales both more attractive and less expensive, and some unlucky individuals who find high cost locales unworthy of the price. Costs of living reflect the aggregation by the market of many individual preferences, not any particular person’s idiosyncratic views. Nevertheless, local prices can contain important information about quality of life that we should not assume away.
* There are numerous sources of up-to-date (2013 or even 2014) national information, including data from:
- the U.S. Department of Labor Bureau of Labor Statistics (BLS)
- the U.S. Census Bureau’s
- American Community Survey (ACS),
- Current Population Survey (CPS), and
- Survey of Income and Program Participation (SIPP),
- the National Association for Law Placement (NALP), and
- from the American Bar Association (ABA)
NALP and ABA data are for the most recent graduating class shortly after graduation. SIPP earnings data includes earnings as recently as 2013, but only through the class of 2008. ACS and CPS have young lawyers and young professional degree holders, but cannot specifically identify young law degree holders. The Department of Education also has information on student loan default rates for recent cohorts. Default rats remain much lower for former law students than for most other borrowers.
Another valuable source of information is After the JD III. Professor Merritt notes that response rates for higher income individuals may be higher in After the JD, but the After the JD researchers, like the U.S. Census, weight their sample to take into account differences in response rates.
**The selection bias issues may be more severe than Merritt has acknowledged. Looking at Ohio State’s 509 report for 2011, there were 24 students who took the NY bar vs. 136 who took the Ohio bar—a substantial percentage of the class taking a bar in a non-adjacent state. The New York bar takers had much higher bar passage rates (11% above the state average for N.Y. vs. 1.3% above the state average for Ohio), which is consistent with positive selection out of state. In any given year, roughly 25 to 50 percent of Ohio State law school graduates who are employed 9 or 10 months after graduation are employed outside of Ohio. For Case Western graduates, employment seems to be even less Ohio-centered than Ohio State.
*** Size of the legal market calculated using ACS data, multiplying number of lawyers by average total personal income per lawyer to get aggregate pay to all lawyers. In other words, the measure is a dollar count, not a body count.
**** It is probably preferable to consider life expectancy within race (life expectancy varies by race, and racial demographics vary by geography).
***** After controlling for GDP per capita, societies with less income dispersion tend to have higher life expectancy. Another issue is selection effects vs. causation. For example, those with higher life expectancy to begin with may choose to pursue additional education and therefore have the opportunity to live in high cost, high income states.
April 27, 2015
New York Times relies on unrepresentative anecdotes and flawed study to provide slanted coverage of legal education (Michael Simkovic)
Just when you thought The New York Times was rounding the corner and starting to report responsibly about legal education based on hard data and serious labor economics studies, their reporting reverts to the unfortunate form it has taken for much of the last 5 years*—relying on unrepresentative anecdotes and citing fundamentally flawed working papers to paint legal education in a negative light.
Responsible press coverage would have put law graduate outcomes in context by noting that:
(1) law graduates continue to do better in terms of employment (both overall and full time) and earnings than similar bachelor’s degree holders, even in an economy that has generally been challenging for young workers
(2) law students, even from some of the lowest ranked and most widely criticized law schools, continue to have much lower student loan default rates than the national average across institutions according to standardized measurements reported by the Department of Education
(3) law graduate earnings and employment rates typically increase as they gain experience
(4) Data from After the JD shows that law graduates continue to pay down their student loans and approximately half of graduates from the class of 2001 paid them off completely within 12 years of graduation
Instead, The New York Times compares law graduate outcomes today to law graduate outcomes when the economy was booming. But not all law graduates. The Times focuses on law graduates who have been unusually unsuccessful in the job market or have unusually large amounts of debt. For example, The New York Times focused on a Columbia law school graduate working as an LSAT tutor** as if that were a typical outcome for graduates of elite law schools. But according to the National Law Journal, two-thirds of recent Columbia graduates were employed at NLJ 250 law firms (very high paying, very attractive jobs),*** and the overwhelming majority of recent Columbia graduates appear to work in attractive positions. (Columbia outcomes are much better than most, but the negative outcomes discussed in The New York Times are substantially below average for law graduates as a whole).
In Timing Law School, Frank McIntyre’s and I analyze long term outcomes for those who graduated into previous recessions, using nationally representative data and well-established econometric methods. Our results suggest that law graduates continue to derive substantial benefits from their law degrees even when graduating into a recession. The recent recession does not appear to be an exception. (See also here and here). This analysis is not mentioned in the recent The New York Times article, even though it was cited in The New York Times less than a month ago (and alluded to in The Washington Post even more recently).
The implication of The New York Times’ story “Burdened With Debt, Law School Graduates Struggle in Job Market” is that there is some law specific problem, when the reality is that the recession continues to negatively affect all young and inexperienced workers and law graduates continue to do better than most. Law school improves young workers’ chances of finding attractive employment opportunities and reduces the risk of defaulting on debt. The benefits of law school exceed the costs for the overwhelming majority of law school graduates.
The New York Times relies heavily on a deeply flawed working paper by Professor Deborah Merritt of Ohio State. Problems with this study were already explained by Professor Brian Galle:
“My problem is that instead DJM wants to offer us a dynamic analysis, comparing 2014 to 2011, and arguing that the resulting differential tells us that there has been a "structural shift" in the market for lawyers. It might be that the data exist somewhere to conduct that kind of analysis, but if so they aren't in the paper. Nearly all the analysis in the paper is built on the tend line between DJM's 2014 Ohio results and national-average survey results from NALP.
Let me say that again. Almost everything DJM says is built on a mathematical comparison between two different pools whose data were constructed using different methods. I would not blame you if now stopped reading."
In other words, it is difficult to tell whether any differences identified by Professor Merritt are:
(1) Due to differences between Ohio and the U.S. as a whole
(2) Due to differences in methodology between Merritt, NALP, and After the JD
(3) Actually due to differences between 2011 and 2014 for the same group
After Professor Galle’s devastating critique, journalists should have been extremely skeptical of Merritt’s methodology and her conclusions. Professor Merritt’s response to Galle’s critique, in the comments below his post, is not reassuring:
“Bottom line for me is that the comparison in law firm employment (62.1% for the Class of 2000 three years after graduation, 40.5% for the lawyers in my population) seems too stark to stem solely from different populations or different methods—particularly because other data show a more modest decline in law firm employment over time. But this is definitely an area in which we need much, much more research.”
Judging from this response and the quotes in The New York Times, Merritt appears to be doubling down on her inapposite comparisons rather than checking how much of her conclusions are due to potentially fatal methodological problems. What Professor Merritt should have done is replicate her 2014 Ohio-only methodology in 2000/2001 or 2010/2011, compared the results for Ohio only at different points in time, and limited her claims to an analysis of the Ohio legal employment market.
There are additional problems with Professor Merritt’s study (or at least the March 11 version that I reviewed).****
- Ohio is not a representative legal employment market, but rather a relatively low paying one where lawyers comprise a relatively small proportion of the workforce.
- A disproportionate share of the 8 or 9 law schools in Ohio (9 if you include Northern Kentucky) are low ranked or unranked, and this presumably is reflected in their employment outcomes.
- Merritt’s sample is subject to selection bias because of movement of the most capable law graduates out of Ohio and into higher paying legal markets. Ohio law graduates who do not take the Ohio bar after obtaining jobs in Chicago, New York, Washington D.C., or other leading markets will not show up in Merritt’s sample.
- Whereas Merritt concludes that law graduate outcomes have not improved, the data may simply reflect the fact that Ohio is a less robust employment market than the U.S. as a whole.
- Merritt’s analysis of employment categories does not take into account increases in earnings within employment categories. After the JD and follow-ups suggests that these within-category gains are substantial, as does overall increases in earnings from Census data.
- Merritt makes a biased assumption that anyone she could not reach is unemployed instead of gathering additional information about non-respondents and weighting the results to take into account response bias. Law schools may have been more aggressive in tracking down non-respondents than Professor Merritt was.
For the benefit of those who are curious, I am making my full 8 page critique of Professor Merritt's working paper available here, but please keep in mind that it was written in mid March and Professor Merritt may have addressed some of these issues in more recent versions of her paper. If that is the case, I trust that she’ll highlight any changes or improvements in a blog post response.
* A few weeks ago I asked a research assistant (a third year law student) to search for stories in The New York Times and Wall Street Journal about law school. Depending on whether the story would have made my research assistant more likely or less likely to want to go to law school when he was considering it or would have had no effect, he coded the stories as positive, negative, or neutral. According to my research assistant, The New York Times reported 7 negative stories to 1 positive story in 2011 and 5 negative stories to 1 positive story in 2012. In 2013, 2014, and 2015, The New York Times coverage was relatively balanced. In aggregate over the five-year period The New York Times reported about 2 negative stories for every 1 positive story. The Wall Street Journal’s coverage was even more slanted—about 3.75 negative stories for every positive story—and remained heavily biased toward negative stories throughout the five-year period.
** Professor Stephen Diamond notes the LSAT tutor’s relatively high hourly wage, more lucrative opportunities the tutor claims he turned down, and how the tutor describes his own work ethic.
*** For the class of 2010, the figure at Columbia was roughly 52 percent 9 months after graduation, but activity in the lateral recruitment market suggests things may be looking up.
**** The comments that follow summarize a lengthy (8 page) critique I sent to Professor Merritt privately in mid March after reviewing the March 11 draft of her paper. I have not had a chance to review Professor Merritt’s latest draft, and Professor Merritt may have responded to some of these issues in a revision.
April 27, 2015 in Advice for Academic Job Seekers, Guest Blogger: Michael Simkovic, Law in Cyberspace, Legal Profession, Of Academic Interest, Professional Advice, Science, Student Advice, Web/Tech, Weblogs | Permalink
April 21, 2015
At the faculty lounge, Professor Bernard Burk of the University of North Carolina echoes questions raised earlier by Professor Merritt of Ohio State about whether it is unethical or misleading for law schools to report employment using the international standard definition of employment. I have discussed these issues extensively before.*
Employment statistics are primarily useful for purposes of comparing alternatives. Comparison requires standard measurements. Standardization is efficient because it reduces the number of definitions that must be learned to use data. The standard definition of employment is meaningful and useful because, notwithstanding preferences for particular kinds of work, a job of some kind is generally preferable to no job at all. This does not mean that employment is the only measurement one should consider, but rather that it is a useful measurement.
Because international standards exist, it is not necessary to explain to a college graduate what a centimeter means when describing the length of an object. Similarly it is not necessary to explain to college graduates contemplating law school what employment means when using the international standard definition of employment.**
College educated individuals who are unfamiliar with standard terminology can easily look up or inquire about the relevant definitions, and once they have learned, can begin to understand a world of data. The standard definitions of employment and unemployment can be quickly discovered through intuitive internet searches. (see searches for unemployment and employment definitions) These definitions are neither obscure nor technically challenging.
In addition, many law schools disclose bar passage rates that are lower than their employment rates. It seems doubtful that many college educated adults contemplating law school—in particular, the subset basing their decisions on outcome data such as employment and bar passage rates—would assume that every law graduate who is employed shortly after graduation is working as a lawyer when many of those graduates cannot legally practice law.
Critiquing international standardized measurements as inherently immoral is not without precedent.
According to Martin Gardner, during the 1800s, a U.S. group attacked the French metric system as atheistic and immoral.
“The president of the Ohio group, a civil engineer who prided himself on having an arm exactly one cubit in length, had this to say . . . : "We believe our work to be of God; we are actuated by no selfish or mercenary motive. We depreciate personal antagonisms of every kind, but we proclaim a ceaseless antagonism to that great evil, the French Metric System. . .The jests of the ignorant and the ridicule of the prejudiced, fall harmless upon us and deserve no notice. . . It is the Battle of the Standards. May our banner be ever upheld in the cause of Truth, Freedom, and Universal Brotherhood, founded upon a just weight and a just measure, which alone are acceptable to the Lord." “
“A later issue printed the words and music of a song, the fourth verse of which ran:
Then down with every "metric" scheme
Taught by the foreign school,
We'll worship still our Father's God!
And keep our Father's "rule"!
A perfect inch, a perfect pint,
The Anglo's honest pound,
Shall hold their place upon the earth,
Till time's last trump shall sound!”
Many thoughtful people believe the U.S.’s non-standard approach to measurement undermines U.S. competitiveness in science, math, engineering, and industry. Time is wasted learning and converting to and from a redundant and inefficient measurement system. This entails opportunity cost and leads to unnecessary and avoidable errors.
Law schools, the American Bar Association, and the National Association for Law Placement would be better served by using standard definitions for labor market measurements when standard definitions are available and widely in use elsewhere, or at least labeling non-standard definitions with names that will not be readily confused with standard definitions.
The ABA currently requires law schools to describe individuals as “Unemployed” who under standard definitions would be defined as either “Not in Labor Force” or “Unemployed.” In other words, “unemployment” as reported under ABA definitions will be higher than unemployment under the standard and most widely used government definition. A number of people have been confused by this, incorrectly claiming that “unemployment” for law graduates is unusually high in comparison to everyone else. In fact, under consistent measurements, the fraction of recent law graduates who are employed is higher than the overall proportion of the population that is employed. (Law graduates also do relatively well on the percent employed full-time).
I agree with Professor Burk that additional information about occupational categories could be useful to some users of data. However, I do not agree that presenting standard summary statistics is inherently misleading or unethical, particularly for the sophisticated audience using the data —college educated, internet savvy adults.