Wednesday, April 29, 2015

Geography Matters (Michael Simkovic)

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 cohortsIndeed, 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:

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.

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