Class of 2007: A More Extreme Bi-Modal Distribution

[By Bill Henderson, cross-posted to ELS Blog]

NALP just published its 2007 edition of Jobs & JD's. One topic of interest to students, lawyers, law firms, and legal educators is the change in salary distribution from 2006 to 2007.  The now famous 2006 bi-modal distribution was vivid evidence that the U.S. legal profession is undergoing significant structural change.  As shown in the graph below (from this NALP webpage entitled "Another Picture Worth a 1,000 Words"), the underlying stressors are even more pronounced for the class of 2007. 

The sample is based on 23,337 law school graduates from the class of 2007 who reported salary information.  Note, however, that 197 ABA-Accredited law schools graduated 43,518 students in 2007.  Although we know the types of jobs taken by 40,416 grads, only 57.7% of this group provided salary information.  If I had to wager on the direction of underreporting, I would predict it was under-inclusive of graduates with lower salaries and those who did not pass the bar.  Why?  Aside from the human psychology that it is easier to share flattering rather than embarrassing information, the roughly 7,500 jobs under the second mode are fairly close to figures I have seen from ALM and NALP data, which are provided by large law firms rather than individual students. See, e.g., charts in this NLJ article.

This bias, however, is not necessarily good news.  In the above graph, 32.5% of the law graduates took jobs with starting salaries in the $100K+ range; but the true percentage for the class of 2007 is probably lower.   Some facts and then one normative observation.  The facts first:

More after the jump ...

• 91.9% of 2007 graduates were employed 9 months after graduation, which compares favorably to 2006 (90.7%), 2005 (89.6%), 2004 (88.9%), and 2003 (89.0%).  I would like to believe these numbers are trustworthy. 
  
• 76.9% were in jobs that required bar passage.  [It would be useful to disaggregate the jobs in the remaining 23.1% of law school graduates.  Who are these students?  How many entered law school with no intention of practicing law? ]
• The median salary in the above distribution is $65,750; the mean is $86,396.  But these measures of central tendency are not reliable guides of future earning power.
• 38% of all starting full-time salaries were less than $55,000 per year, including 18% of all jobs in private practice, 27.5% in business, and 70.0% in government (excluding judicial clerkships).
• 79.6% of law firm jobs in NYC, 80.3% in Washington DC, and 74.9% in Boston were in firms with 100+ lawyers.  Even in Indianapolis, 50.4% were in 100+ lawyer firms.  Wow! those are big numbers.

See also NALP Press Release, July 24, 2008. On the normative front, I have a simple thesis:  the bi-modal distribution is bad for students, bad for law firms, bad for clients, and bad for law schools.  [When I showed the 2007 distribution to one law school dean, she shielded her eyes!]:

• Students.  It is bad for students because at $160,000 per year, many corporate clients will ask that you not be assigned to their matters.  And if your initial work experience is document review, a $160K job can quickly become a dead-end because your skill set is not growing with your billing rate (avg. 1st yr billing rate in a $160K+ firm is $225 to $255/hr).   So the atmosphere among associates at $160K+ firms is probably becoming more competitive.  It would be better in the long run to start at $95K, learn your craft, and become a great lawyer who commands top dollar.  And young lawyers should think long run.

• Clients.  This is bad for clients because the short term solution of requesting only midlevels and partners will eventually constrict the supply of incoming legal talent.  When clients and law firms try to externalize the cost of mentoring and training--here I mean observation, contact, and feedback from partners and clients--associates are more likely to leave.

• Law Firms.  Actually the bi-modal distribution is only bad for firms trying to keep pace with the Am Law 200 salary pay scale.  In contrast, boutiques and organizations like Axiom will find general counsel more interested in their value proposition. For Am Law 200 firms, the difficulty is getting partners to commit themselves to the future of the firm by spending more time and money investing in associates.  This will reduce attrition and protect the brand.   But the $160K+ cost structure provides partners with strong incentives to bill hours rather than investing in the long term future of the firm.

• Law Schools.  The economics of the bi-modal distribution take the pressure off elite law schools--indeed, they can raise tuition! Thus, for many law professors, the best outcome is lateraling into a Top 15 law school.  But more/better law review articles--a precondition of a lateral offer--is not going to solve the difficult institutional problems of lower ranked schools.  Now more than ever, all law faculty members need to understand the structural shifts taking place in our profession.  When faculty at Harvard and Yale ignore these changes, it does not mean that these changes are not important.  It just means that Harvard, Yale, et al. are not affected.

I don't have any solutions to these issues, though I did write up some useful insights in my prior post, "Part II: How law firms misapply the 'Cravath System.'" Our situation reflects difficult collective action and coordination/signaling problems.  For example, how a firm gracefully bows out of the salary wars is an immensely difficult problem.  I do think, however, that permitting nonlawyer investment would provide law firms with the financial wherewithal (and psychological courage) to experiment with more innovation.  And that would be good.  Larry Ribstein's scholarship is now more timely than ever.  See, e.g., here and here.

When I was an interim associate at Sidley & Austin the summer after the 2000 salary wars, a partner told us that "we are all going to hell" based of the jump in salaries from $95K to $125K.  I now worry that he may have been right.