Thursday, March 26, 2015
The Absence of Evidence for Structural Change: Recent Entry Level Outcomes (Michael Simkovic)
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.
(The data above are for unemployment, but the picture is much the same for earnings. See also here).
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.