Is Law a "Mature" Industry?

The Chronicle of Higher Education reports that (HT: Caron):

At a time when law-school graduates are facing greater debt and fewer job opportunities, the University of Miami School of Law has offered to pay accepted students to stay away—at least for a year. The school's unusual offer, which followed an unexpectedly high number of acceptances for this fall's entering class, comes during a period of soul searching in legal education about just how many lawyers the nation needs and whether educators have an obligation to paint a realistic picture of students' prospects for landing jobs that would justify taking out loans of $70,000 or more.

At least 10 new law schools are on the drawing board around the country, in addition to the 200 already accredited by the ABA. At the same time, the demand for legal services has dropped during the economic recession, prompting hundreds of firms to lay off lawyers, cut salaries, and delay the start dates of new associates. As law schools continue to churn out graduates, the resulting bottleneck could make the competition for jobs even more fierce. And some legal experts predict that even when they do resume hiring, many big firms won't be able to continue paying new associates the salaries of $120,000 or more that students had counted on to whittle down their debt.

But that sobering news hasn't stopped students from flocking to law schools, which saw the number of applicants rise 4.3 percent for this fall, according to the ABA. ...

I want to advance the thesis (based in large part on some thoughts I garnered from my colleague Rock Sander) that law may be a mature industry.

The post-war expansion of the regulatory state, the opening of the courthouse doors to new claims during the warren Court era, and the litigation explosion provided an exogenous shock that caused demand for lawyers to rise rapidly. Following a fairly standard s-curve model, the demand for lawyers grew faster than the population and economic expansion would have predicted, driven by the aftermath of those shocks. Over the last couple of decades, however, the market for lawyers has adapted to those shocks. Because there have been no comparable major exogenous shocks affecting the demand for lawyers, the market has matured. We would therefore predict that growth in the demand for lawyers would slow until it reaches a level that can be sustained by population and economic growth.

Characteristics of a mature industry are commonly said to include:

• Consolidation among suppliers: Witness the mergers and growth of large law firms, squeexing out the middle market
• Buyers demand cost reductions and emphasis on service: We see this happening all the time as consumers of legal services, especially at the high end of the market, have become very sophisticated and demanding
• Stiffer competition
• Reduction in innovation: When was the last time there was real innovation in the way lawyers provide services? 

If law in fact is a mature industry, we face a problem of systemic oversupply. The rate at which demand for new lawyers grows has permanently leveled off. Economic recovery will help, but it will not change the fundamental structural changes in the market for lawyers.

Unfortunately, the growth in the number of law schools and size of entering classes at many law schools was premised on the assumption that the demand for lawyers would continue to rise at the high rate characteristic of the period, say, 1960-1990. Because that growth rate was artificially high due to the exogenous shocks of the preceding decades, the number of law schools and large law school class sizes no longer make sense. Indeed, if law schools continue to grow in number and size at their current rate, the gap between demand for new lawyers and the number of new lawyers will continue to rise every year.

Put another way, we have been growing the number of law schools as though the demand for lawyers would permanently continue to experience exponential growth, whereas in fact it follows the classic natural growth S-curve.

My suggestion? Assuming we aren't going to have real free markets for legal services, but will continue to have such barriers to entry as ABA law school accreditation, bar exams, and so on, which presumably would solve the problem, we need to constrict supply. Lop off the bottom third of law schools and see if that solves it.

Comments

[Mark in Spokane]

I agree that a reduction in the number of law schools is called for. But wouldn't a better approach be to reduce the number of schools based on region rather than something as arbitrary as the US News & World Report rankings? For example, does So. Cal. really need all the law schools it has? I would say that a lower-tier school in the midwest probably serves a great function in the grand scheme of things than a much higher ranked school like the University of San Diego does.

[ohwilleke]

Law is a service industry and the demand for lawyers is derivative of the demand for the services that they serve.

Aggregate demand for lawyers isn't very much more economically coherent than talking about aggregate demand for managers, which increasingly is what lawyers are in our economy. Indeed, in most civil law countries, 95% of people with law degrees are professionally categorized as management rather than as attorneys, and do a lot of the transaction work that in house counsel, and "commodity work" outside counsel do in the American economy.

The dramatic rise of the big law firm, especially in financial centers like New York, London and San Francisco is more a product of the rise of Wall Street in the 2000s. Wall Street took the lions share of the nation's economic growth from 2000 until the financial crisis hit, and experienced massive growth in executive compensation while compensation of of senior executives in the "real economy" grew only modestly. Similarly, the rise of Skadden Arps and many of its contemporaries in New York City that became big firms at about the same time, is a product of the rise of the hostile takeover transaction and the increasing importance of "bet the company" superlitigation.

At the peak, the demand for Wall Street lawyers was so great (and the Wall Street component of the growth is clearly reflected in the specialties that were growing within those firms) that 25% of new law school graduates were being sucked up by those firms at six figure salaries. But, that was an exceptional and unprecedented peak.

Big law firms basically didn't exist until the 1950s, and most have become big much more recently. The profession can go on, and a great many lawyers can find gainful employment, even if this market segment shrinks dramatically.

The truth of that matter is that we have simultaneous lawyer oversupply, in industries hit hard by the financial crisis (which are unlike to recover to pre-crisis levels for many years to come), and lawyer shortages, in areas like family law and criminal law.

Law schools do need to change. They need to recall that even at the peak, 75% of lawyers were receiving mid-five figure salaries or less in government, small and medium sized firms, and non-profits, and that a decade ago, that figure was closer to 90%+ and the starting salaries were merely in the high five figures.

Instead of gearing themselves entirely towards serving the needs of large law firms that can finance their own retraining programs if law school don't provide them, they need to refocus on serving the needs of legal employers that need young lawyers who need to be ready for work on day one because they can't afford to train them.

If lawyers are to predominantly finance their educations without any meaningful grants or family assistance, which is the common assumption now, then 10 year repayment periods for student loans don't make sense.

Compensation for lawyers also needs to disaggregate. While investment banks can afford to (indirectly) pay New York City big law salaries to bright young law school graduates and pay CEO class salaries to partners, middle class clients who are underserved cannot.

The solution may ultimately me to follow the lead of the medical profession.

While lawyers actually have specialties so diverse that an outsider would hardly believe that the people doing the work share the same profession, there are still just two formal qualifications in the field (admission to the bar and a paralegal certificate), with specializations determined almost entirely from experience rather than credentials.

The medical profession, in contrast, offers of finely honed panorama of professions and formally certified specialties. A majority of physicians have specialty certification in addition to their M.D. qualification. We have two different supposedly co-equal diagnostic medical professions as well, M.D. and doctors of osteopathy. We also have physician assistants, nurse practioners, registered nurses, licensed practical nurses, pharmacists, physical therapists, professional medical administrators, pathologists, emergency medical technicians and more.

Most the nations of the world have multiple legal professions. England has barristers and solicitors. Most civil law countries have advocates (i.e. barristers), legally trained notaries who have much greater transactional law responsibilities, a judiciary organized as a separate legal profession, often prosecutors organized as a separate legal profession, and a large cadre of people with law degrees holding managerial positions in business and government who are not lawyers per se, but do what American lawyers would do.

There have been nibbles in this direction in the U.S. The federal government has tolerated non-lawyer scrivners in bankruptcy, tax and patent practice. Many states have "victim's advocates," and "children's advocates" (aka guardians ad litem) who are not lawyers, and many states tolerate non-lawyers doing what amounts to legal work in real estate closings and title work. Realtors and business brokers do a lot of the sale of business work for small turn key businesses that is done by attorneys in deals involving bigger businesses. Insurance adjustors frequently come close to the line of insurance defense lawyers in what they do. CPAs sometimes come close to legal practice, and a few states use police to prosecuted personally petty offenses. Lay people are serving as mediators and arbitrators in many fields. Bail bondsmen who are not lawyers are often as or more important to the criminal justice process as public defenders, and their bounty hunter role is transforming criminal law in the era of constitutional criminal procedure. A non-lawyer niche is also developing for people who handle other people's consumer complaints.

Allowing people with a single year of specialized education to practice criminal law (with is relatively separate in procedure and doctrine from civil law) would facilitate increased public subsidies of that education not available when grads are perceived as heading to $145,000 salaries, and would also lower the cost of legal education by reducing its length while providing more professionally relevant classroom instruction than the current curriculum does in that underserved subprofession.

Just as "trans-substantivity" is increasingly being criticized in civil procedure where observers are starting to recognize that different kinds of cases are handled best with different kinds of rules, we need to consider the prospect that different kinds of law need different kinds of lawyers with different professional expectations and educations.

[Vermando]

I fear you may be making unwarranted dreary predictions during a market crash that may not hold up once the market stabilizes. Consider that we just went through a period of rocket growth in demand for associates and associate's salaries at the large law firms at the top of the market which you discuss - first years were earning $160k + bonus and billing out at several hundred dollars an hour, unheard of amounts only a decade ago. The current troubles seem more like a much needed market correction than indications of a new stage in the industry's life cycle.

[greg]

Only problem I see in your analysis is the consolidation among suppliers squeezing out the middle market. A couple of years ago i might say that is true, but what I have been reading about a lot recently is that clients are moving down to mid size firms in order to cut costs.

[David]

Many lawyers at top firms are within 5-10 years of retiring. The legal market will also change because of this. Perhaps a more interesting analysis would consider the combined effects of baby-boomer retirement and shifts in client demands on law firm structure in the future.

[STL]

Doesn't your analysis require that you also look at number of hours billed by lawyer over the past period? If someone is working much more and making more money, can you attribute the greater salary to a boom cycle or is that just reflective of an additional output?

[Rich Leimsider]

Hunh? I'm not sure I see the problem, except from the perspective of the current class of highly paid lawyers.

Taking on $70,000 in debt (and foregoing 3 years income, to be sure), payable over up to 30 years, in exchange for "only" $80,000/year upon graduation still seems a pretty good deal for tomorrow's lawyers.

The real losers, of course, are today's lawyers making $200,000+ in an environment that artificially constricts supply.

I'm not an expert in this market, but it seems reasonable to conclude, as you do, that the supply needs to shrink. However, existing anti-competitive structures that already press in that direction (bar exams, ABA school certifications) would not be a limit on constriction. Those structures limit growth, no?

The market should work just fine in adjusting to society's need for fewer lawyers.

Unless you think we need a bailout for today's lawyers who will face salary pressure? What am I missing?

[wcz]

I think the overproduction of lawyers has also hurt the overall reputation of the profession, (is this possible?). Television advertising has been a disaster, and the number of lawyers that are underemployed and deeply in debt with law school loans has logically increased the number of frivolous claims out there.

[Law School Grad]

There are several forces which reduce the ability of the market to correct itself:

1) Some law schools are not forthcoming about salary data of their graduates; they tend to base statistics only on students who self-report, which is often only a small percentage (e.g. 25%) of graduates. There is a selection bias in who reports - those with bad news are less likely to report it, and some schools make it easiest for students to report offers from lucrative firms that tend to interview on-campus.

WSJ had an extensive article on this situation in 2007, when the legal market in general was still booming. Note that even the NALP salary data only covers 51% of law grads.

2) Those entering law school tend to be quite competitive and ambitious. They tend to overestimate how they will rank among class members. For example, more than 20% of students assume they will be in the top 20% of the class.

3) Law is considered prestigious, and many people in society view it as a power profession. Perhaps that leads those considering law to overestimate what they can accomplish in the profession.

Each of these factors can lead to an artificially high number of college grads to attend law school. The solution is making better information to those considering law school, not necessarily more substantive regulation or barriers to entry.

The best study would be to compare how 2 groups of students with similar GPAs, LSAT, and other credentials did careerwise - 5 years after college graduation. One set would consist of students who attended law school and now have 2 years of legal experience. The other set would consist of students who chose not to attend law school and now have 5 years of work experience.

[Allan]

I think we should not close 1/3 of the law schools, in general. We should close 1/3 of all law schools. A good number of the law schools in the top 2/3 are state schools. Why should the state be supporting these?

I propose that each state be allowed 1 state supported school. Period. Let those schools grow and let the aggregate demand be made up by the private sector.

In California, that would be Hastings, of course.

[jch]

The legal profession ought to follow the example of the dental profession and close down some of the law schools. In the 1980s, it was recognized that there too many dentists, and Georgetown, among others, closed its dental school. The number of ABA and non-ABA schools in California has grown substanitally in the past 20 years. I don't think there will be enough jobs to gainfully employ these graduates, the market is saturated. I suggest that California close two of its taxpayer supported state law schools as a start.

[Joshua Holmes]

Taking on $70,000 in debt (and foregoing 3 years income, to be sure), payable over up to 30 years, in exchange for "only" $80,000/year upon graduation still seems a pretty good deal for tomorrow's lawyers.

Lawyers leaving law school right now do not make $80,000. They make make $130k or more (supposing any big firm is actually hiring). They may make less than a garbageman in government or a small firm, but they're not making $80k. Taking on $100,000 in debt to make $45k is a terrible deal.

That's the problem with the industry. It's split into the super-earners and the lawyers who can barely pay the bills. This isn't healthy for the profession, in the long run.

Truthfully, the ABA and the law schools have repeatedly lied to prospective law students about their prospects. They should have to shoulder some of the burdens of those who are drowning in law school debt.

[GU]

"Taking on $70,000 in debt (and foregoing 3 years income, to be sure), payable over up to 30 years, in exchange for "only" $80,000/year upon graduation still seems a pretty good deal for tomorrow's lawyers.

Actually, it's more like $150k–$180k in debt for law school today.

[Vernunft]

GU is right, it's $150k+ in debt, and you're lucky to make $40k as a public defender somewhere. I suppose this doesn't seem like much of a crisis if you don't actually understand the real numbers.

[Anonopuss]

I believe your article makes a good case for eliminating any public subsidy for law schools. Instead of lopping of the "bottom third" of law schools, why not eliminate all publicly-supported ones? The free market might eventually be able to deal with the private law schools, but as long as there are public subsidies for schools like UCLA, it will contribute to the oversupply.