This will not be a lecture.
However.
In the course of navigating published analysis and coverage of our beloved industry, I can rely on regularly coming across pat assertions displaying such frightful ignorance of basic economics that I’m forced to conclude the speakers’ only encounter with Economics 101 was seeing it listed in a course catalog and hastily moving on. These assertions also tend to be advanced with a degree of certitude and self-confidence directly correlated with the violence they do to the simplest of economic principles.
For today’s purposes, Exhibit A in this ghastly parade comes from The American Lawyer‘s story on BigLaw’s associate bonus season, which kicked off earlier this week with Cravath’s announcement that it would be matching last year’s scale (a base scale of from $15,000 to $100,000, depending on seniority). The usual peer group of firms immediately followed suit; it would only be news had one deviated substantially.
The reporter does a workmanlike job of putting BigLaw associate pay in context over time, noting that today’s $160,000 starting salary has been in place since 2007, meaning it’s only worth $139,500 in 2007 buying power. I might have added a few other contextual benchmarks, such as
- Compared to median household income in the US, first-year associates are comfortably in the top 5%—the threshold for which last year was $167,728;
- And senior associates are pushing close to the top 1% of median household income, which starts at $388,905.
The article also notes that 30 years ago annual tuition at Harvard Law School was about $10,000 and the Cravath starting salary $53,000. In 2007 the average private law school cost $32,367 in tuition annually and in 2013 it had risen to $41,985; at top-tier schools (Harvard and NYU are cited) it’s north of $57,000 these days.
Fair enough; now comes the invitation for Econ 101 malpractice.
I see a connection between the two markets, but not in the sense that you’re thinking of. I agree that it’s not proper to blame what large firms are willing to pay new top-tier associates for law schools increasing tuition. As you observe, law schools charge what the market will bear. But the law school tuition market is influenced on the buy-side by what prospective law students think they will earn after they graduate. That is, students’ perception of the market for law firm associates affects what they’re willing to pay to go to law school and get the qualifying degree. Law schools don’t set their tuition based on what law firms are paying new associates, but law students set their willingness to pay in part on what they expect to earn after they graduate. Until the last few years, law schools could continue to increase tuition because so many of their students believed, incorrectly, that the $160,000/year jobs would be available to everyone.
The real parties at fault are the students, for being uneducated; had more of them taken college math and economics, they would have figured out the fair value of a law education and many would have chosen other careers.
Re: lawyers proudly stating “I didn’t go to law school to [be a bean-counter/sell used cars/understand samples, randomness, and probability/______.”
Plus the common client complaint that their outside legal counsel doesn’t understand the client’s business.
*Those two seem to be much more connected.
Bravo, Bruce. Until firms discover that their profitability comes from offering the most cost-efficient service, valued at a price that clients are willing to pay (so they won’t they insource it, automate it, or send it to a multidisciplinary non-law-firm service provider), this “mine is bigger than yours” madness will continue. On the client side, too many in-house leaders enable this behavior, at the expense of their own client’s financial interests. The ultimate result is one that no one wants: a lot of great firms and great lawyers will go the way of the dinosaurs, all the while wondering what went wrong and why they couldn’t continue to make a sustainable living.
Susan, I am not sure you are following Bruce’s point. Client’s should not care about what firms pay their associates. Pay for associates is influenced by the defined labor market for “high performing” “top talent” associates. The supply of talented hard working associates and demand for their services by firms drive the bonus pricing.
Susan: Our friend “AS” has it right. It’s irrational for clients to care what firms pay their associates–and it’s equally irrational, while we’re at it, for clients to care what any firm’s PPP is.
Let’s abstract from Law Land and this may be more clear. If I’m trying to decide between a BMW and an Audi (I’m not, since I live in Manhattan and don’t own a car!), should I care what their assembly-line workers make? Or what their CEO’s make, for that matter? I suppose I could care if I were worried about sweatshop labor (highly unlikely in this example), but even if that were my concern, it would still have nothing whatsoever to do with the relative merits of their product/service offerings. I might boycott Nike, say, if I fell under the sway of bad publicity about factory conditions, but that still has nothing to do with the absolute quality and value of their shoes.
Now, there may be many reasons for law firms to fail, and client dissatisfaction must certainly rank high on that list, but that’s a topic for another day.