The Million Dollar Law Degree and Right-Sizing Legal Education

Bankruptcy prof Mike Simkovic and labor economist Frank McIntyre have an interesting paper about the value of a law degree. The paper's gotten a good deal of coverage (see here and here), not least because of the intense concern within the legal academy about the future business of legal education. Simkovic & McIntyre's paper is the first serious attempt to use basic principles of labor economics to quantify the present value of a law degree. Their basic finding is that at the 25%, median, and 75% distributions, the additional earnings that come from having a law degree greatly exceed the cost of a legal education in present dollars.  

This is a good study, and I don't have any major methodological quarrels with it. But I do want to urge some caution about overreading the study's findings.

As an initial matter, no empirical study is flawless. This study is well-designed, but there are some obvious limitations with the data, especially given how many people with law degrees don't practice law, and there are also concerns about selection bias warping the comparison between those with and those without law degrees. Simkovic and McIntyre address these issues head on and empiricists have to work with the data that's available, not the ideal set. So unlike some critics, I'm not particularly concerned about perceived methodological issues. 

Instead, I want to add a note of caution about how to read the results. The study looks at data about lawyers' earnings from 1996-2011. Thus, what it would seem to be telling us is about the value of a law degree in the past. I don't think most of the "law school scam" folks would dispute that historically a law degree has been a very good investment for most. Yet from the perspective of someone considering law school, what really matters is the value of a law degree in the future. The past might be the best predictor we have, but to the extent that there is a secular shift going on in the legal employment market, this study wouldn't capture it. In other words, while there's some valuable information in the Simkovic & McIntyre paper, it hardly puts to rest the question of whether a law degree remains a good investment for most everyone. 

Simkovic and McIntyre question whether there is a structural market change occuring and, if so, whether it really spells doom for legal employment. Their evidence is that employment and profits-per-partner have rebounded since 2008 and that past predictions of doom for the legal profession (with the advent of typewriters, e.g.) turned out to be false. They also make a half-hearted case that recent regulatory reforms: Dodd-Frank and ObamaCare, e.g., might turn out to be a full-employment act for lawyers. Still, Simkovic and McIntyre are on much weaker ground when attempting to evaluate the future of the profession than they are elsewhere in their paper. Weil Gotshal's layoffs and reduction in partner compensation is a pretty strong indication that there are stresses, at least at the top of the market. That does not mean that we are going to see a wholesale shift in legal employment or compensation, but it cautions against relying on historical figures.  

Given the historical numbers, I think it's likely that a law degree will continue to be a good investment for most students. But I don't really have any empirical basis for that assumption, and I suspect it might not be the case going forward at the tail end of the distribution. For weaker students from weaker schools, law school might not be a good investment.  This is the point Brian Tamanaha has been making in reference to students who are paying full tuition to go to marginal schools.  

If so, it suggests that we've got too many law schools and are producing too many lawyers, at least for the jobs that pay well enough to make law school a good investment. In other words, what we might be seeing right now is a right-sizing of the supply of lawyers into the market. 

Right-sizing will be incredibly painful for faculty and staff who lose their jobs. It will also be painful for the surplus of law grads in the market. The hard truth, though, is that some schools need to close and others need to shrink their class (and faculty/staff) sizes. Too many schools, aided by either endowments or support from their universities, will try to ride out the storm, and this will simply extend the over-supply problem longer than needs to occur. Every school wants the reduction in supply to come from some other school. The collective action problem is likely to extend the supply/demand imbalance and might ultimately result in an overcorrection in supply.

State bar examiners could help with this problem by raising bar passage requirements, but that will just create a mass of JDs who can't get admitted to practice. But it's not at all clear how to coordinate the production of fewer JDs within the confines of the antitrust laws. If this were a normal for-profit industry, the weakest producers would be out of business fairly fast. But in a world of non-profits with endowments and sugar-daddy universities all eager not to lose face, it might be a while before we get back to a sustainable market equilibrium. 

Comments

[Frank]

Isn't it usually the case that the law school supports the university, rather than the other way around? Look at what happened at Catholic U. If the relationship is switched for a few years, seems like a pretty equitable result.

[Adam]

Frank--that's right. Usually the law school is the cash cow. But in a for-profit situation a money-losing division might well be eliminated or spun-off. That does happen sometimes in education (witness G'town's no-longer-extant dental school), but my sense is that educational institutions will tolerate negative cash flow for much longer than a for-profit. This also means that stand-alone law schools don't have that larger university to turn to. There's only the endowment serving as a cushion.