Wednesday, July 22, 2015
If you're trying to maximize the financial value of an undergraduate degree, it is better to bet on course of study than college prestige. Indeed, prestige is largely irrelevant to those who major in engineering, computer science, or math. In contrast, prestige does matter for art & humanities grads, albeit the financial returns are significantly lower than their tech counterparts.
These are some of the takeaways from Part I of this blog post. Part I also presented data showing that law is a mix of both: financial returns have been high (cf. "red" tech majors) and prestige matters (cf. "blue" arts & humanities crowd).
The goal of Part II is to address the question of whether the pattern of high earnings/prestige sensitivity will change in the future. I think the answer to this question is yes, albeit most readers would agree that if law will change is a less interesting and important question than how it will change. Speed of change is also relevant because, as humans, we want to know if the change is going to affect us or just the next generation of lawyers.
Shifts in the Legal Market
There are a lot of changes occurring in the legal market, and those changes are altering historical patterns of how legal services are being sold and delivered to clients. In the past, I have thrown around the term structural change, yet not with any clear definition. To advance the conversation, I need to correct that lack of precision.
In economics, there is a literature on structural change as applied to national or regional economies (e.g. moving from a developing nation to an industrial nation; or moving from an industrial to a knowledge-based economy). Investors also focus on structural change within a specific industry because, obviously, large changes can affect investor returns. When I have used the term structural change on this blog, it has been much closer to investor conceptions. Investopedia offers a useful definition even if it's somewhat colloquial:
Definition of 'structural change': An economic condition that occurs when an industry or market changes how it functions or operates. A structural change will shift the parameters of an entity, which can be represented by significant changes in time series data.
Under this definition, the legal industry is certainly undergoing structural change. The proportion of law graduates getting a job in private practice has been on the decline for 30 years; over the last 35 years, the average age of the licensed lawyer has climbed from 39 to 49 despite record numbers of new law school graduates; the proportion of associates to partners has plummeted since the late 1980s. See Is the Legal Profession Showing its Age? LWB, October 12, 2014. Since the early 2000s, long before the great recession, associate-level hiring has been cut in half. See Sea Change in the Legal Market, NALP Bulletin, August 2013.
Likewise, among consumers of legal services, there is a lot of evidence to suggest that lower and middle class citizens can't afford a lawyer to solve life's most basic legal problems, thus leading to a glut of pro se litigants in state courts and many more who simply go without things like contracts and wills. This troubling trend line was obscured by a boom in corporate legal practice, albeit now even rich corporations have become more sensitive to legal costs -- the sheer volume and complexity of legal need is outstripping their budgets. In response to the lag in lawyer productivity and innovation, there is a ton of investor-backed enterprises that are now elbowing their way into the legal industry. See A Counterpoint to "the most robust legal market that ever existed in this country", LWB, March 17, 2014.
The impact of all this change -- structural or otherwise -- is now being felt by law schools. Applicants are down to levels not seen since the 1970s, yet we have dozens more law schools. It has been said by many that law schools are losing money, albeit we have zero data to quantify the problem. Based on my knowledge of my own law school and several others I am close to, I am comfortable saying that we have real changes afoot that affect how the legal education market "functions or operates."
There is a sense among many lawyers and legal academics that the legal world changed after 2008. None of the "structural" changes I cite above are pegged in any way to the events of that year.
What did change in 2008, however, was the national conversation on the legal industry, partially due to the news coverage of the mass law firm layoffs, partially due to important books by Richard Susskind and later Brian Tamanaha and Steve Harper, and partially due to a robust blogosphere. This change in conversation emboldened corporate legal departments to aggressively use their new found market power, with "worthless" young associates getting hit the hardest. This new conversation in turn exposed some of the risks of attending law school, which affected law school demand. But alas, this was all fallout from deeper shifts in the market that were building for decades. Let's not blame the messengers.
Dimensions of Change
I am confident that the future of law is going to be a lot different than its past. But I want to make sure I break these changes into more discrete, digestible parts because (a) multiple stakeholders are affected, and (b) the drivers of change are coming from multiple directions.
Dimension 1: basic supply and demand for legal education
To unpack my point regarding multiple dimensions, let's start with legal education. Some of the challenges facing law schools today are entirely within the four corners of our own house. Yet, legal education also has challenges (and opportunities) that arise from our connection to the broader legal industry. This can be illustrated by looking at the relationship between the cost of legal education (which law schools control, although we may blame US News or the ABA) and entry level salaries (which are driven largely by the vagaries of a client-driven market).
The chart below looks at these factors. My proxy for cost is average student debt (public and private law schools) supplied by the ABA. My income variables are median entry level salaries from NALP for law firm jobs and all entry level jobs. 2002 is the first year where I have all the requisite data. But here is my twist: I plot debt against entry-level salary based on percentage change since 2002.
If a business nearly doubles its price during the same period when customer income is flat, demand is going to fall. Thus, the sluggish entry-level market presents a difficult problem for legal education. Sure, we can point to the favorable statistics from the AJD or the premium that a JD has historically conferred on lifetime earnings, but law professors are not the people who are signing the loan papers. The chart above documents a changing risk/reward tradeoff. To use the frame of Part I, the red dots are sinking into the blue dot territory, or at least that is the way prospective students are likely to view things.
Fortunately, smaller law school classes are going to be a partial corrective to low entry-level salaries. The biggest law school class on record entered in the fall of 2010 (52,488); in 2014, the entering class had shrunk by over 27% (37,942). When entry-level supply is reduced by 25+%, upward pressure on salaries will build. Yet, the composition of the legal economy and the nature of legal work is clearly changing. Further, the rate of absorption of law school graduates into the licensed bar has been slowing for decades. See Is the Legal Profession Showing its Age? LWB, October 12, 2014. It would be foolhardy to believe that time and fiscal austerity alone are going to solve our business problems. Instead, we need to better understand our role as suppliers to a labor market.
Dimension 2: The content of legal education
The content of legal education is not necessarily fixed or static. We could change the content, thus affecting how the market responds.
To provide a simple example, one of my students is starting work this fall at Kirkland & Ellis. From a financial perspective, this is a good employment outcome. He will be moving to Chicago with his girlfriend who just received her MS in Information Systems from IU's Kelley School of Business. The MS from Kelley is a very "red" degree. It can also be completed in one year (30 credit hours). Well before she graduated, this recent grad had competing offers from PWC and Deloitte, both in the $80,000 range. For many Indiana Law students, an ideal post-grad outcome would be $80K in Chicago at an employer who provides challenging work and high-quality training. Yet, my student's girlfriend got this ideal outcome in 1/3 the time and likely 1/2 the cost of an Indiana Law grad.
Perhaps we should consider cross-pollinating these disciplines. A huge portion of the legal profession's economic challenges is attributable to flat lawyer productivity -- customers are struggling to pay for solutions to their legal needs. Information systems are a huge part law's productivity puzzle. Below is a chart I use in many of my presentations on the legal industry. The chart summarizes the emerging legal ecosystem by plotting the Heinz-Laumann two-hemisphere model against Richard Susskind's bespoke-to-commodity continuum. [Click-on to enlarge.]
The key takeaway from this diagram is that the largest area of growth is going to be in the multidisciplinary green zone -- the legally trained working shoulder-to-shoulder with those skilled in information systems, statistics, software development, and computational linguistics, to name but a few. These are "red" disciplines. Do law schools want to be part of this movement? Let me ask this another way -- do law schools want to be relevant to the bulk of the legal market that needs to be rationalized in order to maintain its affordability? Harvard grads will have options on Wall Street for the foreseeable future. But 98% of law schools operate in a different market. Further, some HLS grads, or students who might qualify for admission to Harvard, might prefer the big upside rewards that are only available in the green zone. In short, a new hierarchy is emerging in law that is still very much up for grabs.
If an academic wants to better understand the rapidly changing nature of legal work, I would urge them to visit a large legal department with a substantial legal operations ("legal ops") staff. These are the professionals who have been empowered by general counsel to find ways to drive up quality and drive down cost using data, process, and technology. These are the folks who are making build-versus-buy decisions, putting pressure on law firms to innovate in order to hang on to legal work, and experimenting with NewLaw legal vendors.
I am finishing up a story on legal ops professionals for the ABA Journal. (By the way, legal ops exist in law firms as well as legal departments and green zone legal vendors. The role is most developed, however, in legal departments.) My editor flagged the issue that virtually all of the legal ops people in the story did not graduate from prestigious law schools (or any law school).
My only response is that legal operations people have specialized skills and knowledge (often "red" but sometimes involving EQ) that others lack; without these skills, they can't do the job. Legal ops people live in a world of outputs and metrics. For example, are legal expenses and settlement amounts trending down over time -- yes or no? If so, by how much? How much internal staff time does it take to negotiate a revenue contract? How much of this process can be automated? What will it take to get our staff to accept the new system?
As these examples show, a legal ops person is typically going to be evaluated based on measurable outputs -- do they get results? Where someone went to law school is an input that is likely irrelevant to the question. The only qualifier is whether the curriculum of that school provided valuable, specialized domain knowledge -- most likely non-legal red skills but also skills related to teams, communication, and collaboration.
Dimension 3: The value of pedigree to the customer
Law has historically been what economists call a “credence good.” This means that a layperson has a difficult time assessing quality. As a result, proxies for quality, such as pedigree or prestige, have historically been very important when hiring a lawyer or law firm.
One of the reasons that the field of legal operations is gaining momentum is because it is creating tools and systems that enable clients to look past credentials to obtain information on things they really care about, such as cost, outcome, and speed of delivery. There are now companies coming into existence that are gathering data on lawyers' win-loss rates. See Another Example of Using Big Data to Improve Odds of Winning in Court, LWB, April 12, 2015. Sure, apples-to-apples comparisons are very difficult to make -- every case is unique in some respect. But the amount of money at stake is large enough that the data challenges will be surmounted. When that day arrives, we won't opine on the value of pedigree to legal outcomes; we'll just calculate it. More significantly, clients focused on outcomes will change their buying patterns. Early returns I have seen suggest that the value of pedigree to legal outcomes may be close to negligible.
Do any of us care where the engineers who designed our smart phones went to college? Not really. We just care how well the smart phone works.
In this respect, the future of law is likely headed in the direction of Google (a pure red company). In the early days, the founders of Google favored grads of Caltech, Stanford and Berkeley. But over time, the company learned that prestige of graduate school was a poor predictor of job success. Because Google lives and dies by its outputs, the company changed its hiring model to attract the most qualified engineers. See George Anders, The Rare Find: How Great Talent Stand Out 1-5 (2012) (telling the story of how data changed the attitudes of Google founders regarding elite credentials and altered the Google hiring model).
I have lived long enough to know that the changes I describe above are not necessarily going to be welcomed by many lawyers and law professors. If a group benefits from a lifelong presumption of merit, it is natural that group will resist evidence that the presumption is not fully warranted. Indeed, much of the skepticism will be rooted in subconscious emotion. If the presumption is dashed, those of us in the elite crowd will have to spend our days competing with others and proving ourselves, or even worse, watching our kids soldier through it. We have little to gain and a lot to lose in the world we are heading into. Yet, behind the Rawls veil of ignorance, how can we complain?
So with the red-blue crosscurrents, is law school still worth the investment?
That is a relevant and reasonable question that many young people are contemplating. I will offer my opinion, but markets are bound to follow their own logic.
This is a time of enormous uncertainty for young people. Education clearly opens doors, but tuition is going up much faster than earnings. Further, competition among knowledge workers is becoming more global, which is a check on wages. Of course, if you don't invest in education, what are your options?
I am generally on the side of Michael Simkovic and Frank McIntrye that the education provided by a law degree, on average, significantly increases lifetime earnings. See The Economic Value of a Law Degree (April 2013). How could it not? The law is too interconnected to every facet of society to not, on average, enhance the law grad's critical thinking skills. Nearly 15 years of out of law school and I regularly use what I learned at Chicago Law to solve problems and communicate solutions, particularly in my applied research work with law firms and legal departments. While my Chicago Law credential has value independent of the skills and knowledge I obtained (the red AJD bar chart in Part I strongly suggests that), I can't deny the additional value of the actual skills and knowledge I obtained to solve real world business problems. It's been substantial.
In general, I also agree with Deborah Jones Merritt that there is significant evidence that the entry-level market for lawyers is weak and oversaturated. See What Happened to the Class of 2010? Empirical Evidence of Structural Change in the Legal Profession (April 2015). The class of 2010 is not faring as well as the class of 2000. Indeed, the lead economist for Payscale, Katie Bardaro, recently noted that wages are stagnating in many fields, but especially in the legal profession. "More law schools are graduating people than there are jobs for them...There’s an over-saturated labor market right now. That works to drive down the pay rate.” See Susan Adams, The Law Schools Whose Grads Earn the Biggest Paychecks in 2014, Forbes, Mar. 14, 2014.
In the face of these stiff headwinds, I think law schools have an opportunity to pack more value into three years of education. See Dimension 2 above. To be more specific, if you are a protege of Dan Katz at Chicago-Kent, you will have a lot of career options. Ron Staudt, also at Chicago-Kent, has quietly built a pipeline into the law and technology space. Oliver Goodenough and his colleague at Vermont Law are making rapid progress with a tech law curriculum. And at Georgetown Law, Tanina Rostain and Ed Walters (CEO of Fastcase) provide courses that are cutting edge.
But absent these types of future-oriented instruction, what is the value of a JD degree as it is commonly taught today? That value is clearly positive; I would even call it high. But whether the value is sufficient to cover the cost of attendance is likely to vary from law grad to law grad. Lord knows, in a world of variable tuition based on merit scholarships and merit scholarships that go away after the 1L year, the swing in cost can be a $250K plus interest.
What is killing law school applications these days is the lack of near certainty among prospective students that the time and expense of law school will pay off. The world looks different than it did in the fall of 1997 when the vast majority of the AJD respondents entered law school. Tuition and debt loads are higher and high paying entry-level jobs are harder to obtain.
So what is the solution? For students, it's to bargain shop for law schools, which is bad news for law schools. For law schools, it's to add more value to an already valuable degree. Some of that value will come in the form of red technical skills that will make lawyers more productive. In turn, this will prime demand for more legal products and services.