Class of 2007: A More Extreme Bi-Modal Distribution

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:

• 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 $160+ 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.

Comments

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[anon]

Sigh

[Marc]

"The economics of the bi-modal distribution take the pressure off elite law schools--indeed, they can raise tuition!"

I don't think I agree with this statement. Non-top-14 schools have felt free to raise tuitions, sometimes at double digit rates.

[Big Mike]

NYC Attorney says: "In this current job market, its either biglaw or bust. There is no in between."

That might be true in NYC. I'm not familiar with that market. But there may be those sorts of somewhat-lower-pay-but-greater-experience jobs in other markets.

I just accepted an offer in Phoenix at a firm I've been at since my 2L summer. It pays $77,500, and I've had a huge range of experience (a couple trials, client meetings, all sorts of motion practice).

Maybe my experience isn't typical. But maybe these sorts of jobs are more common outside of the biglaw strongholds of NYC, LA, Chicago, DC, SF, etc.

[colin]

I agree with you that caste systems can be very unhealthy, and I'm not suggesting that the current system is in any way ideal. I just think that it makes a lot of sense for a law firm to be able to hire lawyers for different jobs with different levels of responsibility and different pay grades. That work that contract attorneys do has to be done by someone. If you were hired as a straight associate and were given unending doc-review assignments, I'm sure it would lead to the same result of boredom and lack of career advancement. Isn't that, and the resulting expense of higher attrition levels among valuable associates, one of the various reasons, along with straight cost savings, for instituting the current system? The partners realize that most associates won't become partner, which is nothing new, but they don't want to be actively driving away good talent and hurting their own reputations as good places to work.

It is unfortunate if anyone with contract attorney on their resume is untouchable for a straight firm gig, though that seems to be a problem currently. That's a problem that will need to be corrected if this business is going to avoid implosion, and I'm positive that it will be corrected given the extreme importance of a healthy and happy labour supply in the field of law. If there is untapped profit to be had by hiring the unhirable contract attorneys, then someone will start hiring them to perform other jobs. These are just growing pains as the profession adjusts itself to a rapidly changing global marketplace. As for whether there is anything to the notion that they should get the same job because both the contract attorney and the 1st year associate paid the same amount for their law degree, i'll withhold comment until I can stop laughing.

[ERB]

Also, I would like to see these stats broken out by "legal niche". I suspect someone practicing IP law or M&A is making a higher salary than someone representing indigent clients or practicing as an Assistant DA.

[Bill Henderson]

NYC Attorney,

My "long run" comment is directed at firms. You are right; there is a paucity of $95K jobs. But if some large firms were brave enough to offer a long-term proposition to young lawyers and clients, the could build a more sustainable, attractive model that does not waste talent. At $95K, the economics permit more training, mentoring, and lower billable hours targets.

The clients are really holding the cards here. High attrition is not, in the long run, good for them.

I want my students to be happy and successful. But making $160K and doing all document review (while a handful of others get good training) is not the best way to achieve that goal. bh.

[NYC Attorney]

I take issue with your statement that, " It would be better in the long run to start at $95K, learn your craft, and become a great lawyer who commands top dollar." In this current job market, its either biglaw or bust. There is no in between. Most lawyers start out earning 40-60 in small and mid sized law firms, and then gradually move up to the 60-100K salary bracket.

[Corey]

The contract attorneys paid as much for law school as the 160K kids. The job has no benefits, no long term prospects or month-to-month security, and you are being managed by newly minted 160K kids who don't mind the existence of an underclass. The 160K kids have a false mythology already developed by which the contract attorneys chose and are happy in their positions. It astounded me the first time I got staffed supervising a large review.

Caste systems are bad for social harmony even if they are (arguably) efficient. Even Adam Smith opposed stratification taken to its extremes:

"In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible to become for a human creature to become."

But if you need an answer that appeals to your own self-interest, look back at H.G. Wells and remember that the Morlocks eat the Eloi.

[colin]

I don't understand the complaining about an underclass. Seems to me like having a more tiered system in biglaw would be a good thing if it helps bridge the bi-modal distribution. It's not like it ever made much organizational sense that everyone should be on the same partner-track, and it makes even less sense in this age of 100-1000 lawyer megafirms. The world is full of crappy jobs, and contract attorney/doc-review is better than almost all of them.

[Corey]

Do you have anything other than anecdotal evidence that clients are refusing to allow firms to staff $160K attorneys on their matters? My anecdotal experience suggests nothing has changed. Billing rates are NOT bimodal within a firm, and the $160K attorney is still the cheapest option if you want to use Firm X and their intimidating global brand name.

I think you would find that there are increasingly two types of firms, large ones that can access the Fortune 500 client base---clients that will pay $300 an hour for a first year and $800 for a partner without blinking---and mid-level firms that are chasing the mid-level clients who want to be big time but just can't afford it. Those mid-level firms doubtless feel the pressure you describe, but I don't think Skadden is having trouble billing. (I do think they are investing more into their biggest clients.)

The one area that clients won't pay $300 an hour for is electronic doc review, and all the big firms have created relationships with third party contract attorney sweatshops. The $160K attorney ends up supervising and performing quality control over 5 of her peers from lower tier schools who make $30 an hour, ten hours a day.

But electronic doc review would be too pricy at $125K as well, there is just far too much data that can be produced far too easily. e-Discovery is a plausible leading factor in the creation of a new underclass of pseudo-biglaw attorneys.

[Bill Henderson]

Baron, your insight on regional practice is certainly true. The big markets are going the fastest, which is a factor in the salary level and size of the second mode. The Jobs & JD monograph does provide some of that useful information by giving salary ranges by geography and practice setting. bh.

[Baron]

I wonder how this holds up in different regions. Are graphs available that eliminate the inflationary effects of LA, Chicago, DC, and NY? Are graphs available for individual small to mid-market cities?

I doubt this graph is of much use to a Tulsa or Oklahoma law school student wishing to practice in Tulsa or Oklahoma City, just to use one state without a large market as an example.

[Bill Henderson]

Christine, I think you are right. The size of the modes will very by school. The left mode will be smaller at Harvard/Yale/Chicago/Stanford et al.

Going down the hierarchy, the left mode gets larger and the right mode eventually disappears.

This school level data is very important to entering students. And it is important for professors to understand and empathize with their students and the pressures they are under. thx. bh.

[Christine Hurt]

Bill, as you know, I find this topic fascinating. One aspect that I've been debating in the halls around here is this -- how bimodal are starting salaries for individual schools? I can imagine a prospective law student looking at the distribution and thinking "Yes, but that's the fourth tier over to the left and my first-tier school is on the right." But I bet that's not true. I would hypothesize that for most top-tier schools, the distribution is still bi-modal. Some of that might be more voluntary at a top school -- graduates going into public interest jobs, which may be very prestigous and hard to get, but don't pay well. Do you know if it's possible to get distributions from individual schools? I would love to see one.