The Protectionism Premium

August 18th, 2013 / By

Brian Sheppard of Seton Hall Law School has raised an interesting point about any financial premium associated with the JD: How much of that premium rests on the legal profession’s restrictions to entry? At the end of his post, Sheppard suggests that an “empirical study of the effects of various protectionist measures would be a worthwhile” endeavor.

I know about one such analysis, conducted by Mario Pagliero. Pagliero, an economics professor at the University of Turin, explored the relationship between bar exam difficulty and entry-level salaries for U.S. lawyers. Pagliero’s study relies on the circumstance that most of our states administer a common set of bar questions (the Multistate Bar Exam or MBE), while establishing very different passing scores. States have also changed their passing scores over the last few decades, offering a robust dataset of passing scores that vary by state and time.

Pagliero compares these passing scores with entry-level salaries reported by NALP for corresponding states and times. In this way, he explores whether exam difficulty (as measured by passing score) bears any relationship to entry-level salary.

In an initial paper, Pagliero reports a clear relationship between the two: more difficult bar exams correlate with higher entry-level salaries. He also finds that lower pass-rates correspond with higher salaries, suggesting that the first correlation relates to supply rather than quality. More difficult bar exams, in other words, reduce the supply of lawyers. Reduced supply, in turn, raises entry-level salaries. By Pagliero’s calculation, a 1% increase in bar exam difficulty corresponds with a 1.7% increase in starting salaries.

In a second paper, Pagliero uses the same data to examine a frequently debated policy question: Do licensing standards help consumers by reducing information asymmetries (in other words, by providing information about quality that consumers cannot readily obtain on their own)? Or do the standards primarily serve the profession, by restricting entry and raising salaries? Based on the data and his modeling, Pagliero concludes that, for the U.S. legal profession, “licensing, as implemented, increases salaries and decreases the availability of lawyers, thus significantly reducing consumer welfare.” (p. 481)

This isn’t terribly surprising. The legal profession enjoys significant barriers to entry: applicants must master (and pay for) four years of college, three years of law school, and the bar exam. Increasingly, they must also devote time to low-paid or volunteer apprenticeships. These substantial barriers reduce competition, allowing lawyers to charge a premium for their services.

How can this premium persist in the face of under- and unemployed lawyers? It is difficult for many of those lawyers to compete against established firms. Ethics rules prohibit lawyers from using outside investments to build a practice; lawyers may take loans, but may not share profits with nonlawyers. New lawyers also lack access to adequate supervision unless they obtain jobs with existing firms. Law graduates who fail to obtain jobs at prevailing wages may seek work in other fields rather than attempting to undercut fees.

If at least some lawyer income stems from protectionism, that raises at least two important questions. First, is protectionism good policy? Pagliero’s model suggests that US courts protect lawyers, rather than the public, by limiting access to the profession. Based on these results, other authors have called for deregulation of the profession. As individuals struggle to obtain affordable legal services, and courts flounder in a growing sea of pro se litigants, calls to deregulate the profession will continue.

Second, even without formal deregulation, the work reserved exclusively for licensed lawyers is shrinking. Companies like Legalzoom and RocketLawyer, which provide low-cost legal documents to individuals and small businesses, are flourishing. Software like WillMaker is even cheaper. My husband and I produced a full set of wills, powers of attorney, and living wills for less than $25.

These services cannibalize the work available to lawyers serving individuals and small businesses. Corporate firms, meanwhile, are losing business to in-house compliance officers, HR officials, and others who administer complex regulations for their companies. Within BigLaw, US-licensed lawyers have lost jobs to software and overseas attorneys.

The biggest threat to lawyers’ historic livelihood comes, not from technology or globalization alone, but from the way in which those forces encroach upon work that once belonged exclusively to lawyers. Lawyers, like other workers, are seeing some of their jobs lost to computers or overseas workers. For us, however, the loss may be greater than for those in unregulated fields. To the extent our incomes depended partly on a protectionism premium, we may lose a significant part of that premium as consumers find ways to address legal needs without direct representation by lawyers.

, View Comment (1)

Financial Returns to Legal Education

July 21st, 2013 / By

I was busy with several projects this week, so didn’t have a chance to comment on the new paper by Michael Simkovic and Frank McIntyre. With the luxury of weekend time, I have some praise, some caveats, and some criticism for the paper.

First, in the praise category, this is a useful contribution to both the literature and the policy debates surrounding the value of a law degree. Simkovic and McIntyre are not the first to analyze the financial rewards of law school–or to examine other aspects of the market for law-related services–but their paper adds to this growing body of work.

Second, Simkovic and McIntyre have done all of us a great service by drawing attention to the Survey of Income and Program Participation. This is a rich dataset that can inform many explorations, including other studies related to legal education. The survey, for example, includes questions about grants, loans, and other assistance used to finance higher education. (See pp. 307-08 of this outline.) I hope to find time to work with this dataset, and I hope others will as well.

Now I move to some caveats and criticisms.

Sixteen Years Is Not the Long Term

Simkovic and McIntyre frequently refer to their results as representing “long-term” outcomes or “historic norms.” A central claim of the study, for example, is that the earnings premium from a law degree “is stable over the long term, with short term cyclical fluctuations.” (See slide 26 of the powerpoint overview.) These representations, however, rest on a “term” of just sixteen years, from 1996-2011. Sixteen years is less than half the span of a typical law graduate’s career; it is too short a period to embody long-term trends.

This is a different caveat from the one that Simkovic and McIntyre express, that we can’t know whether contemporary changes in the legal market will disrupt the trends they’ve identified. We can’t, in other words, know that the period from 2012-2027 will look like the one from 1996-2011. Equally important, however, the study doesn’t tell us anything about the years before 1996. Did the period from 1980-1995 look like the one from 1996-2011? What about the period from 1964-1979? Or 1948-1963?

The SIPP data can’t tell us about those periods. The survey began during the 1980s, but the instrument changed substantially in 1996. Nor do other surveys, to my knowledge, give us the type of information we need to perform those historical analyses. Simkovic and McIntyre didn’t overlook relevant data, but they claim too much from the data they do have.

Note that SIPP does contain data about law graduates of all ages. This is one of the strengths of the database, and of the Simkovic/McIntyre analysis. This study shows us the earnings of law graduates who have been practicing for decades, not just those of recent graduates. That analysis, however, occurs entirely within the sixteen-year window of 1996-2011. Putting aside other flaws or caveats for now, Simkovic and McIntyre are able to describe the earnings premium for law graduates of all ages during that sixteen-year window. They can say, as they do, that the premium has fluctuated within a particular band over that period. That statement, however, is very different than saying that the premium has been stable over the “long term” or that this period sets “historic norms.” To measure the long term, we’d want to know about a longer period of time.

This matters, because saying something has been “stable over the long term” sounds very reassuring. Sixteen years, however, is less than half the span of a typical law graduate’s career. It’s less, even, than the time that many graduates will devote to repaying their law school loans. The widely touted Pay As You Earn program extends payments over twenty years, while other plans structure payments over twenty-five years. Simkovic and McIntyre’s references to the “long term” suggest a stability that their sixteen years of data can’t support.

What would a graph of truly long-term trends show? We can’t know for sure without better data. The data might show the same pattern that Simkovic and McIntyre found for recent years. On the other hand, historic data might reveal periods when the economic premium from a law degree was small or declining. A study of long-term trends might also identify times when the JD premium was rising or higher than the one identified by Simkovic and McIntyre. A lot has changed in higher education, legal education, and the legal profession over the last 25, 50, or 100 years. That past may or may not inform the future, but it’s important to recognize that Simkovic and McIntyre tell us only about the recent past–a period that most recognize as particularly prosperous for lawyers–not about the long term.

Structural Shifts

Simkovic and McIntyre discount predictions that the legal market is undergoing a structural shift that will change lawyer earnings, the JD earnings premium, or other aspects of the labor market. Their skepticism does not stem from examination of particular workplace trends; instead it rests largely on the data they compiled. This is where Simkovic and McIntyre’s claim of stability “over the long term” becomes most dangerous.

On pp. 36-37, for example, Simkovic and McIntyre list a number of technological changes that have affected law practice, from “introduction of the typewriter” to “computerized and modular legal research through Lexis and Westlaw; word processing; electronic citation software; electronic document storage and filing systems; automated document comparison; electronic document search; email; photocopying; desktop publishing; standardized legal forms; will-making and tax-preparing software.” They then conclude (on p. 37) that “[t]hrough it all, the law degree has continued to offer a large earnings premium.”

That’s clearly hyperbole: We have no idea, based on the Simkovic and McIntyre analysis, how most of these technological changes affected the value of a law degree. Today’s JD, based on a three-year curriculum, didn’t exist when the typewriter pioneered. Lexis, WestLaw, and word processing have been around since the 1970s; photocopying dates further back than that. A study of earnings between 1996 and 2011 can’t tell us much about how those innovations affected the earnings of law graduates.

It is true (again, assuming for now no other flaws in the analysis) that legal education delivered an earnings premium during the period 1996-2011, which occurred after all of these technologies had entered the workforce. Neither typewriters nor word processors destroyed the earnings that law graduates, on average, enjoyed during those sixteen years. That is different, however, from saying that these technologies had no structural effect on lawyers’ earnings.

The Tale of the Typewriter

The lowly typewriter, in fact, may have contributed to a major structural shift in the legal market: the creation of three-year law schools and formal schooling requirements for bar admission. Simkovic and McIntyre (at fn 84) quote a 1901 statement that sounds like a melodramatic indictment of the typewriter’s impact on law practice. Francis Miles Finch, the Dean of Cornell Law School and President of the New York State Bar Association, told the bar association in 1901 that “current conditions are widely and radically different from those existing fifty years ago . . . the student in the law office copies nothing and sees nothing. The stenographer and the typewriter have monopolized what was his work . . . and he sits outside of the business tide.”

Finch, however, was not wringing his hands over new technology or the imminent demise of the legal profession; he was pointing out that law office apprentices no longer had the opportunity to absorb legal principles by copying the pleadings, briefs, letters, and other work of practicing lawyers. Finch used this change in office practices to support his argument for new licensing requirements: He proposed that every lawyer should finish four years of high school, as well as three years of law school or four years of apprenticeship, before qualifying to take the bar. These were novel requirements at the turn of the last century, although a movement was building in that direction. After Finch’s speech, the NY bar association unanimously endorsed his proposal.

Did the typewriter single-handedly lead to the creation of three-year law schools and academic prerequisites for the bar examination? Of course not. But the changing conditions of apprentice work, which grew partly from changes in technology, contributed to that shift. This structural shift, in turn, almost certainly affected the earnings of aspiring lawyers.

Some would-be lawyers, especially those of limited economic means, may not have been able to delay paid employment long enough to satisfy the requirements. Those aspirants wouldn’t have become lawyers, losing whatever financial advantage the profession might have conferred. Those who complied with the new requirements, meanwhile, lost several years of earning potential. If they attended law school, they also transferred some of their future earnings to the school by paying tuition. In these ways, the requirements reduced earnings for potential lawyers.

On the other hand, by raising barriers to entry, the requirements may have increased earnings for those already in the profession–as well as for those who succeeded in joining. Finch explicitly noted in his speech that “the profession is becoming overcrowded” and it would be a “benefit” if the educational requirements reduced the number of lawyers. (P. 102.)

The structural change, in other words, probably created winners and losers. It may also have widened the gap between those two groups. It is difficult, more than a century later, to trace the full financial effects of the educational requirements that our profession adopted during the first third of the twentieth century. I would not, however, be as quick as Simkovic and McIntyre to dismiss structural changes or their complex economic impacts.

Summary

I’ve outlined here both my praise for Simkovic and McIntyre’s article and my first two criticisms. The article adds to a much needed literature on the economics of legal education and the legal profession; it also highlights a particularly rich dataset for other scholars to explore. On the other hand, the article claims too much by referring to long-term trends and historic norms; this article examines labor market returns for law school graduates during a relatively short (and perhaps distinctive) recent period of sixteen years. The article also dismisses too quickly the impact of structural shifts. That is not really Simkovic and McIntyre’s focus, as they concede. Their data, however, do not provide the type of long-term record that would refute the possibility of structural shifts.

My next post related to this article will pick up where I left off, with winners and losers. My policy concerns with legal education and the legal profession focus primarily on the distribution of earnings, rather than on the profession’s potential to remain profitable overall. Why did law school tuition climb aggressively from 1996 through 2011, if the earnings premium was stable during that period? Why, in other words, do law schools reap a greater share of the premium today than they did in earlier decades?

Which students, meanwhile, don’t attend law school at all, forgoing any share in law school’s possible premium? For those who do attend, how is that premium distributed? Are those patterns shifting? I’ll explore these questions of winners and losers, including what we can learn about the issues from Simkovic and McIntyre, in a future post.
.

, View Comments (8)

About Law School Cafe

Cafe Manager & Co-Moderator
Deborah J. Merritt

Cafe Designer & Co-Moderator
Kyle McEntee

ABA Journal Blawg 100 HonoreeLaw School Cafe is a resource for anyone interested in changes in legal education and the legal profession.

Around the Cafe

Subscribe

Enter your email address to receive notifications of new posts by email.

Categories

Recent Comments

Recent Posts

Monthly Archives

Participate

Have something you think our audience would like to hear about? Interested in writing one or more guest posts? Send an email to the cafe manager at merritt52@gmail.com. We are interested in publishing posts from practitioners, students, faculty, and industry professionals.

Past and Present Guests