$180,000

June 20th, 2016 / By

BigLaw firms gave 2016 graduates a sweet gift earlier this month: new associates at many of those firms will earn $180,000 (rather than $160,000) when they start work in the fall. That’s the first salary increase in BigLaw since 2007.

What should we make of this increase? It shows, certainly, that many BigLaw firms continue to prosper. But we already knew that from the firms’ reports of profits per partner. We also knew that associates are the most productive workers at those firms. This raise reflects rather belated recognition of that fact.

One could argue, in fact, that BigLaw partners are still undervaluing their associates. As Bruce MacEwen notes, the increase doesn’t match inflation since the last increase in BigLaw salaries. $180,000 in 2016 has less buying power than $160,000 did in 2007.

But those kids are going to be alright. I want to focus here on a shadow side of the BigLaw salary increase, one that the press and blogs haven’t discussed. BigLaw firms are paying more money–but to many fewer associates. This trend, which concentrates higher salaries in a smaller number of workers, has important implications for the legal job market.

Higher Salary, Fewer Associates

We don’t know the precise number of associates who will receive the $180,000 salary, but we have a useful proxy: the number of new graduates working at firms with more than 500 lawyers (which I’ll refer to here as “BigLaw”). Some of those BigLaw firms aren’t paying $180,000, but some smaller firms are doing so. On balance, the number of BigLaw associates is a useful (although possibly high) estimate of the number of new graduates set to earn the new $180,000 salary.

So let’s take a look at the number of entry-level lawyers hired by BigLaw firms. In 2007, when BigLaw firms raised starting salaries to $160,000, those firms hired 4,745 new lawyers. The number jumped to 5,193 in 2008 and peaked there.

After significant cutbacks during the dark years of 20102012, BigLaw hiring rebounded in 2013. That year the BigLaw firms hired 3,980 new lawyers. Since then, however, hiring levels have stalled. The biggest firms hired 3,952 new graduates in 2014 and 4008 in 2015. We won’t know the 2016 figures until sometime next spring, but the total seems likely to remain at the 4,000 plateau.

The number of new JDs hired by BigLaw firms, in other words, has fallen by 22.8% since 2008. The new, lower level has been stable for several years; there’s no sign that it will rise.

The decline, moreover, is even larger if we focus on BigLaw associates. In 2008, BigLaw firms still hired most of their new lawyers as partnership-track associates. Almost all of those BigLaw hires in 2008 received the $160,000 starting salary (or a somewhat lower regional equivalent).

But after 2008, firms began bifurcating their entry-level hiring. They continued to hire new associates at top salaries, but they also retained staff attorneys at much lower salaries. Orrick began employing “career associates” at a Wheeling, West Virginia, office in 2009. WilmerHale followed with a Dayton, Ohio, office for staff attorneys in 2010.

Other firms created similar positions, although they were harder to track. In 2014, however, NALP began reporting “associate” positions separately from “staff attorney” or “law clerk” ones. The numbers are eye opening. Fully 14.1% of the 2014 JDs hired by law firms took one of the latter positions. That’s one out of every seven new law firm lawyers. (Another 2.1% took positions as paralegals or administrators, reducing the percentage of associates to just 83.9% of law firm jobs.)

BigLaw firms aren’t the only ones to hire staff attorneys or law clerks, but they have the largest programs for staff attorneys. If we assume that just half of the staff attorneys hired in 2014 went to BigLaw (and none of the law clerks), that reduces the number of entry-level associates hired by BigLaw firms in 2014 to 3,469. That’s a decrease of one third (33.2%) from the number of new associates hired by those firms in 2008.

We won’t have 2015 figures for staff attorneys until August, when NALP publishes data on the 2015 class. Information about the Class of 2016 will have to wait yet another year. A comfortable projection, however, puts the number of BigLaw associates hired from the classes of 2015 and 2016 at no more than 3,500 per year.

The Bottom Line: Associates x Salary

Let’s look now at the bottom line for BigLaw firms: How much do those firms spend on new associate salaries today compared to eight years ago? In 2008, when entry-level hiring peaked, those firms employed 5,193 new lawyers. Almost all of those new lawyers were associates, because firms had not yet created entry-level staff attorney positions. If we assume that firms paid all of those associates $160,000, the relatively new going rate, they shelled out a total of $830,880,000 in salary for those associates. (Again, I’m using BigLaw associates as a proxy for associates paid the top rate. Some associates at the largest firms received less, while some at smaller firms earned top dollar.)

The firms have now agreed to pay $180,000 to those new associates. But there are at most 4,000 of them–and more likely just 3,500. Total salary expenditure will range from $630,000,000 (for 3,500 associates) to $720,000,000 (for 4,000 new associates). Total cost, in other words, has declined by at least $110 million.

If you consider inflation, firms are saving a whopping $207 million or more. That’s because $830,880,000 in 2008 translates to $927,100,000 in 2016. Total savings in constant 2016 dollars, therefore, is $207,100,000 ($927,100,000 minus $720,000,000), if we assume that BigLaw firms are still hiring 4,000 new associates a year. The inflation-adjusted savings rises to $297,100,000 if we assume that the number of associates has decreased to 3,500.

Firms are spending some of that savings, of course, on the staff attorneys and contract attorneys who are taking the place of partnership-track associates. Firms also need to invest in new technology to enhance their associates’ productivity. Still, I doubt that any BigLaw partners are selling their second homes to finance this raise.

What Does This Mean for the Job Market?

The increase in BigLaw salaries has several sobering implications. First, it underscores the plateau in BigLaw hiring. With the recession receding, BigLaw firms could have chosen to expand their associate ranks. Indeed, they could have moved their staff attorneys to the partnership track and paid them more. They could even have offered permanent positions to the contract lawyers working for them. Instead, they chose to raise salaries for their pared down associate classes.

That was the rational, predictable course for firms to take. They have learned how to distribute work among different categories of legal workers, and they can find plenty of job-seeking JDs to work as staff attorneys and contract lawyers. Law firms have also learned to use technology to facilitate their disaggregation and to make employees at every level more productive.

Indeed, the pattern we are now seeing–higher salaries for a smaller number of elite lawyers–is exactly what we would expect in a market characterized by disaggregation, globalization, and technological gains. Those forces make individual lawyers more productive, which allows salary increases. The same trends, however, decrease the number of new lawyers needed to do the same work. The impact is particularly acute at the top of the any work chain, because those lawyers incorporate the productivity gains of the lawyers beneath them.

This is the second implication of the recent salary increases for BigLaw associates: It confirms the impact that disaggregation, globalization, and technology are having on the legal job market. The Great Recession exaggerated those forces, but the recession ended years ago. We are seeing the ongoing effects of these other, more lasting forces.

What about salaries for workers in other law-related jobs? Does the boost in BigLaw salaries signal more money for law graduates in other positions? Unfortunately, there’s no reason to think so. Law schools continue to graduate a large number of JDs into a market that is no longer growing nearly as fast as it once did. Clients, especially on the business side, have also learned to shift increasing amounts of law-related work to non-lawyers.

These market realities have reduced salaries for new law graduates. In 2008, graduates who reported salaries to NALP earned a median of $72,000 for full-time jobs that would last a year or more. By 2014 (the most recent year available), that median had fallen to $63,000–or just $57,300 in inflation-adjusted dollars. That’s a decline of 20.4% in real dollars.

Some of that decline may result from increased reporting of low entry-level salaries. But national data for all salaried lawyers also show declining salaries in real dollars. In 2008, the twenty-fifth percentile income for salaried lawyers was $74,980; the median was $110,590; and the seventy-fifth percentile was $163,320. Using constant 2008 dollars, those salaries had dropped to $69,310, $105,209, and $158,314 by 2015. Those declines aren’t as steep as the ones drawn from NALP data, but they’re still noticeable.

Don’t get me wrong: Employers will continue to hire new lawyers each year, both for replacement and for modest growth. Salaries will also increase modestly–although recent trends suggest that those increases won’t keep up with inflation (even for those highly paid BigLaw associates). The BigLaw salary increases, however, do not signal a return to the pre-recession job market. If anything, it’s just the opposite.

 

 

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  • Unemployed_Northeastern

    A few random notes:

    1. Indeed, not all large law firms pay market rate. For instance, there are a few multi-hundred attorney insurance defense mills out there. One of them has about 800 attorneys and is rather notorious for having a starting salary that is about 1/2 market rate (and has a billing requirement well over 2000 hours).

    2. Tuition. Let’s not forget about tuition in the context of these salaries. Yes, $180k in 2016 is not worth what $160k was in 2007. But to make things worse, annual tuition at Biglaw-feeding law schools like Harvard and Columbia was at or just shy of $40,000 in 2007. They are at or just shy of $60,000 today. That’s a 50% tuition increase during a time of absolutely stagnant market wages. And less than half of the student bodies at those two schools get any form of tuition discounting. It’s also worth noting that some graduate school loans were still subsidized in 2007; that is not the case anymore.

    3. Similarly, even despite the Great Recession, the cost of living in the markets where one is most likely to see Biglaw offer market rates – NYC, DC, San Francisco, Boston – has gone up unabated.

    4. All of the major legal industry reports – Citi Private Bank, Thomson Reuters, Altman Weil, etc – predict lower and lower hiring levels in the future, as more work traditionally done by associates is shuffled off to contract/staff attorneys, LPOs, support staff, automation, or is simply done inhouse by clients. I’ve seen managing partners in Altman Weil reports say that they expect associate hiring levels in a decade’s time be 60%, at best, of what it is today.

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