Thursday, March 26, 2015
The Problem of Short-Termism (Michael Simkovic)
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.