Drawing the Right Lessions from the Bleak Entry-Level Legal Job Market

[by Bill Henderson, co-posted to the ELS Blog]

As the fall progresses, many law students and law school administers will be trying to assess the direction of three market trends: (1) the number or percentage of summer associates who receive offers of permanent employment; (2) the prevalence of deferrals among those lucky enough to be offered jobs; and (3) the volume of summer offers coming out of this year's OCI process. Nobody expects cheery numbers.  But as the market information comes in over the next few months, law schools will be in a better position to assess the new landscape. 

In a nutshell, here is the issue:  Since the last major legal recession of the early 1990s, elite law schools adapted their business model to the seeming certainty of virtually guaranteed high paying jobs for their graduates.  This meant increasing tuition, hiring more faculty, reducing teaching loads, and generally loading more debt onto students.  For at least the last 15 years, the sizzling corporate legal market made this high-cost model financially viable, even though the only thing these models maximized (or strongly incentivized) was faculty scholarship.  Because corporate counsel are fundamentally changing how they value and buy outside legal services, there may not be enough high-paying entry level jobs to support the very high cost of legal education, even at elite schools. 

Yet, unbelievably, due to the weighting of per pupil direct expenditures, schools with higher cost structures generally fare better in the US News rankings.   Among elite schools, direct expense (financed with high tuition, high student debt, and large endowments) is the input that keeps the elite schools at the top of the pecking order -- Yale's is three times the average, and Harvard, Stanford, NYU, and Columbia are more than double.  Of course, less elite law schools wishing to become more elite--i.e., pretty much every school with a few exceptions-- have tried to keep up by modeling themselves after elite schools, including a "scholarship-first" strategy.  Thus, the cost structure at virtually all law schools has climbed far in excess of the earning capacity of the median law school graduate. See Morriss & Henderson, The New Math of Legal Education, ABA Young Lawyer (July 2008). Yet, due to deficiencies in (a) information, and (b) how information is analyzed, the status quo rolls on.  

I can think of at least four reasons for these information inefficiencies. 

• Naivete.  The modal student entering law school is not homo economicus. Rather, he or she is young, inexperienced, and overly impressed with branding--largely through US News--and the opinions of peers. IQ does not shield the young from overconfidence and the reflexive desire to impress others through the acquisition of positional goods.  Indeed, sometimes intelligence in the absence of commonsense can make matters worse.  

• Poorly Priced Credit.  Banks have lent students funds without a sharp eye to repayment risk. The terms of loans are largely the same regardless of law school attended, geographic market conditions, and law school performance.  Yes, historically law students have repaid their loans.  But that is the same sloppy logic that created the housing bubble.  The only way the math works is if the vast majority of law school graduates, despite low or no starting salaries, experience a steady, multi-year surge in income.  This is a foolish assumption for anyone who understands the current state of law firm economics.  Of course, just like most home mortgages, student debt over and above the Federal Stafford Loans, often get bundled together, turned into securities, and sold.

• Law Schools are Self-Interested and Locked in a Positional Competition.  This is not a criticism; it is a statement of fact.  Law schools work very hard to manage their market position, including their US News rank, because students and alumni can be completely demoralized with a significant decline. It does not matter if the decline in quality is illusory; stakeholders will declare the patient sick.  This may surprise naive law students, but law schools cannot be counted on to be an objective broker.  We need a regulator to level the playing field and force us to be transparent.  Which brings me to my fourth point ... .

• Failure of Self-Regulation.  The ABA Section on Legal Education and Admission to the Bar bears some responsibility here, but not become it has accredited too many law schools -- the antitrust implications of barring market entry are real.  Rather, the Section has become too focused on the comfort of its law school members.  If the Section collected and published detailed employment outcome information in a way that facilitated school-to-school comparisons--yes, just like US News--the information would trickle down to potential law schools.  It is not helpful to say that 15% of a school's graduates work in business -- they need to know how many of those 15% are waiting tables, driving a cab, or selling insurance.  Re jobs in private practice, how many are working as contract attorneys?  Nobody really knows, and the issue is not on the Section's agenda.  If these data are published, some law schools would probably go out of business.

With corporate firms experiencing sluggish demand and tremendous downward pressure on fees, changes in hiring patterns (both the number of jobs and their remuneration) are going to exert tremendous pressure on law schools to rethink their business models.  To my mind, the proper response is for law schools to really think through how they can maximally enhance the human capital of law school graduates.  (Others might think the proper response is offer the same quality at a lower price, which is the situation confronted by most law firms these days.) 

Here, the greatest risk is drawing the wrong inferences from the historical record and confusing market signals with professional education that truly enhances the decision-making and judgment of young lawyers.  For the last several decades, entry level-lawyer remuneration--a tempting market-based metric of value-added--has been based on a combination of branding and sorting of raw inputs.  In other words, it is not the curriculum at Harvard or Yale, or the massive scholarly output of the faculty, that drove the demand for their graduates.  Rather, it was the Ivy-League brand (think Pavlov's dog) buttressed by statistics that these schools had admitted students with very high IQs.  In turn, firms used this information to signal their superior collective credentials to their clients.  At end of the day, pedigree definitely has CYA value for many general counsel.  But the Bi-Modal distribution suggests that this signal became dramatically overvalued. See Henderson, The Bursting of the Pedigree Bubble, NALP Bulletin (July 2009).

So the open question goes to the very heart of professional education:  what type of law school curriculum and teaching methods are really worth the price paid by today's students?  Even if law schools instituted a moratorium on the writing of law review articles for an entire academic year, our collective brain power may be inadequate to answer this question.  But I guarantee that the answer requires a strong engagement with practicing lawyers and recourse to empirical methods -- not necessarily to publish articles (that is a mere second order effect) but to refashion and retool what and how we teach. The schools that rise to this challenge are, in the long run, going to fare better than those who continue to be believe that more faculty law review articles will raise the school's ranking, thus enticing more employers to hire their students.