Supply & Demand for 1/2/3L’s

Wednesday, July 18, 2012

Comes word (prominently in the WSJ Law Blog) that the New York City Bar Association has formed a task force to “search for a solution” to the simply awful legal job market, in which only 55% of the Class of 2011 had found full-time positions requiring a law degree nine months out from graduation.

Here’s the story:

Carey R. Dunne, the new president of the bar association, said the group will convene for the first time in September. He has charged the group with isolating the causes of the job shortage and making recommendations, which he expects in about a year.

“This isn’t just a hand-wringing exercise,” said Mr. Dunne, chairman of Davis Polk & Wardwell LLP’s litigation practice.

Here is the list of participants:

 

Law School Deans and Leaders

 

Michelle J. Anderson – Dean, CUNY School of Law

 

Matthew Diller – Dean, Cardozo Law School

 

David Schizer – Dean, Columbia Law School

 

William Treanor – Dean, Georgetown Law School

 

David B. Wilkins – Director, Program on the Legal Profession, Harvard Law School

 

Government Attorneys

 

Michael Cardozo – Corporation Counsel of the City of New York

 

Charles J. Hynes – District Attorney of Kings County

 

Cyrus R. Vance, Jr. – District Attorney of New York County

 

Large Law Firm Leaders

 

Richard I. Beattie – Chairman, Simpson Thacher & Bartlett LLP

 

Eric J. Friedman – Executive Partner, Skadden, Arps, Slate, Meagher & Flom LLP

 

Brad S. Karp – Chairman, Paul, Weiss, Rifkind, Wharton & Garrison LLP

 

Julian Pritchard – U.S. Managing Partner, Freshfields Bruckhaus Deringer LLP

 

Kathleen M. Sullivan – Partner, Quinn Emanuel Urquhart & Sullivan, LLP

 

Solo, Small and Medium Sized Law Firms

 

Laurie Berke-Weiss – Partner, Berke-Weiss & Pechman LLP

 

Andrew G. Celli, Jr. – Founding Partner, Emery Celli Brinckerhoff & Abady LLP

 

Carmelyn P. Malalis – Partner, Outten & Golden LLP

 

Alla Roytberg – Founder, Law Firm and Mediation Practice of Alla Roytberg, P.C.

 

Eric Seiler – Partner, Friedman Kaplan Seiler & Adelman LLP

 

Charles A. Stillman – Founding Member, Stillman & Friedman, P.C.

 

Legal Services Organizations

 

Steven Banks – Attorney-in-Chief, The Legal Aid Society

 

Raun J. Rasmussen – Executive Director, Legal Services NYC

 

Chief In-House Counsel

 

Eric Grossman – Chief Legal Officer, Morgan Stanley

 

Don H. Liu – General Counsel, Xerox

 

Elizabeth D. Moore – General Counsel, Consolidated Edison, Inc.

 

Amy W. Schulman – General Counsel, Pfizer Inc.

 

Jane C. Sherburne – General Counsel, The Bank of New York Mellon Corporation

 

Wanji J. Walcott – Managing Counsel, American Express Company

 

Career Services and Recruiting Professionals

 

Camille Chin-Kee-Fatt – Director of Career Services, Brooklyn Law School

 

Sharon Crane – Director of Legal Recruiting, Davis Polk & Wardwell LLP

[Disclosure: I know nearly a dozen of these people, some extremely well, although I have no insider’s information about the task force’s formation or plans.]

Criticizing such an eminently worthy and high-profile effort—on virtually any grounds—would be beyond churlish.

So we’re not going to do that; indeed, the only humane response is to wish them well and hope that your god of choice smiles on their efforts so that it indeed avoids being “a hand-wringing effort.”

Nevertheless, the task force’s formation does provide an occasion for a foray into market analysis:  Specifically, analysis of the market for newly minted law school graduates.  Now, this particular market is so oddly structured that it provides any number of rewarding targets for describing and commenting upon how it differs from almost all other  markets, but fundamentally it still obeys supply and demand 101.

Before getting to that, however, let us briefly rehearse the peculiar characteristics this market appears to share with no other market I’m aware of.

The BiModal Salary Distribution

This has been well-documented for at least a decade, but it only seems to be getting more extreme.

Courtesy of the indefatigable NALP, here are the distribution curves for the last five years (back to before the Great Reset):

2011

 

2010

 

2009

 

2008

 

2007

 

Summing this all up over the past few years is NALP (again) (emphasis supplied).  Because they’ve done it so well, I have little to add.

As NALP reported in June, the employment profile for this class also marks a continued interruption of employment patterns for new law school graduates that had, prior to 2010, been undisturbed for decades. Just 49.5% of employed graduates obtained jobs in law firms – compared with 50.9% for the Class of 2010 and 55.9% just two classes ago (see “Class of 2011 Law School Grads Face Worst Job Market Yet – Less Than Half Find Jobs in Private Practice” available at www.nalp.org/classof2011). Moreover, the distribution of those jobs by size of firm continued to shift, with relatively fewer jobs in the largest firms and relatively more jobs in firms of 50 or fewer attorneys. Nearly 60% of the law firm jobs taken by the Class of 2011 were in firms of 50 or fewer attorneys, compared with 53% for the Class of 2010 and 46% for the class of 2009. (These figures do not include graduates starting their own solo practice after graduating.) The proportion of jobs in firms of more than 250 lawyers decreased from 33% to just over 21% in just two years. This shift was reflected in the salary figures for the Class of 2010, and again in 2011.

The national median salary for the Class of 2011, based on those working full-time for at least a year and reporting a salary, was $60,000, compared with $63,000 for the Class of 2010 (falling nearly 5%), and the national mean was $78,653, compared with $84,111 for the Class of 2010 (falling 6.5%). Because more salaries were in the $40,000-$65,000 range and fewer were at the $145,000 or $160,000 level, for the first time in many years, the median represented a salary actually obtained by many graduates. Thus, nearly 23% of reported salaries were within $5,000 of the median.

The national median salary at law firms based on reported salaries was $85,000, compared with $104,000 the prior year (falling 18%), again reflecting the shift in the distribution of these jobs, and also salary adjustments on the part of some firms. Although salaries of $160,000 still prevail at the largest firms, their share has dropped, creating further downward pressure on the median. And though still a tiny minority, salaries of less than $100,000 at large firms are more common than just a year ago, as more graduates are taking staff attorney or similar positions at lower salaries. See Figure 1 below.

Figure 1. Starting Salaries: Classes of 2009, 2010, and 2011

 

 

2009 2010 2011 Decrease 2009-2011
Median Salary: $72,000 $63,000 $60,000 17%
Mean Salary: $93,454 $84,111 $78,653 15%
Median Firm Salary: $130,000 $104,000 $85,000 35%
Mean Firm Salary: $115,254 $106,444 $97,821 15%

 


Now let’s talk about supply and demand, and one other critical characteristic of markets in general:  “Transaction costs,” which mean:

The costs other than the money price that are incurred in trading goods or services. Before a particular mutually beneficial trade can take place, at least one party must figure out that there may be someone with which such a trade is potentially possible, search out one or more such possible trade partners, inform him/them of the opportunity, and negotiate the terms of the exchange. All of these activities involve opportunity costs in terms of time, energy and money [including search and information costs and decision costs].

As for supply and demand, NALP more than ably laid out the demand side above; there isn’t enough of it.  More precisely, the demand curve for new law graduates has shifted down and to the left over the past several years, a la this graphic, where the blue curve is the old demand and the black curve is the new demand:

The old/blue demand curve intersects with the (unchanged) supply curve at both a higher price and a higher quantity than the new/black demand curve (red lines to axes).  Today, fewer law grads at lower prices suffice for the market to “clear.”

In order for the market to clear:

  • (a) matching the old price, the supply curve would have to shift up and to the left (fewer grads getting jobs, but those who do being pickier about price) or;
  • (b) matching the old quantity, the supply curve would have to shift down and to the right (grads being less picky about price).

Obviously, neither is attractive given the world we have inherited from the pre-boom times: (a) is unpalatable to the increased number of law grads who won’t find jobs as lawyers; and (b) is unpalatable to everyone who does find a job, only one that pays a disappointing salary. Not “palatable,” but for lots of people better than unemployment or facing the prospect of throwing away three years of your life and $150,000. In other words, the new demand curve will find takers, painful as the adjustment is.

But the problem is we have two curves here, not one: This supply curve grossly misrepresents the curve representing law schools’ actual history of pumping out grads.

A more realistic supply curve would be nearly vertical, meaning no matter what the price essentially the same quantity of law grads will be pumped out by the schools.  (Technically, you could say that the price elasticity of supply is virtually zero, or that supply is almost price-invariant.)

We know this is actually the way the world is working. Law schools have been, so far, entirely isolated from market pressures so they’ve had no incentive to cut the supply of grads they’re producing. (Actually, a very few schools such as Hastings, cutting enrollment, and Northwestern, thinking about it, are making realistic adaptations, but their moves in the right direction may be more than outweighed by the implacable perversity of places such as Cooley opening a new campus, and other not-yet schools attempting to start from scratch.)

What this gives us is a demand curve that is market-responsive and a supply curve that’s not.

In order for the supply curve to be subject to market forces and actually respond to them, one or more of several highly improbable things would have to happen:

  • Law schools would have to drastically, and voluntarily, cut class sizes and/or close entirely, which means that
  • Faculty tenure would have to be rescinded or otherwise bargained away;
  • Universities would have to forego the cash cow law schools have been; and/or
  • The delusional, infuriating, and sanctimonious ABA would have to enter the 21st Century (could we settle for the 19th, guys?—capitalism had actually been invented by then).

It would be pointless to continue; none of these is on the horizon.

My own prediction, which I believe I share with Washington University at St. Louis law professor Brian Tamanaha in his just-published and enviably superb book, Failing Law Schools, is that some combination of the following two things will happen before we can escape from the fundamental disconnect that “the cost of a legal education today is substantially out of proportion to the economic opportunities obtained by the majority of graduates:”

  • close to a generation of law students will suffer grievously, until
  • a large number of law schools suffer a violent encounter with creative destruction.

But until that day, and if there’s no immediate hope in supply/demand responding to actual market forces, what about “transaction costs?”

Today the transaction costs involved in law firms recruiting students are, by the standards of any other comparable marketplace, simply exorbitant.  The conventional recruiting forum is “OCI,” a/k/a on campus interviewing, which occurs in August at law schools nationwide, and which has the following characteristics:

  • Law firms extending offers to students must hold them open for exactly 28 days, no more no less, per NALP guidelines, down from a 45 day window previously.  The practical effect of this one-size-fits-all 28-day limit is quite obvious and direct: Firms need to interview every potentially interesting student within 28 days of the starter’s pistol launching OCI.  Not surprisingly, AmLaw 200 firms describe it as a “brutal,” “insane” “feeding frenzy” as they scramble to interview students nationwide, make callbacks, and extend offers within an arbitrary four-week window.  One firm customarily has over 140 lawyers traveling for a couple of weeks during OCI, and the timing is so compressed that “the hiring committee can’t even meet—we’re making decisions by BlackBerry.” The all-in cost of a major firm participating in OCI at a leading school can exceed $75,000.
  • The tightly compressed time frame is the result of an “arms’ race” as firms, schools, and students all jockey to be first in the calendar.  As one analyst put it, describing how this inevitably leads to suboptimal decisions:”Firms wait for their top-ranked candidates to decline their offers before making offers to their second-tier candidates, but by the time they make those second-tier offers, the second-tier candidates have already accepted offers at their second-tier firms, not willing to risk losing their offers while holding out for their preferred firms. Now, both the firm and the candidate are in less desirable situations than they could have been—they are mismatched.”
  • Schools control access to students; at Top Tier schools, firms cannot even select who they will be interviewing, nor can they see transcripts or grades before the moment they walk into the interview room. This requires firms to sign up for many more interview “schedules” than they would actually need (and pay schools separately for each schedule), in order to have a decent chance of meeting the students they might really be interested in.
  • You might think firms could reach out to students in advance of OCI, but this is strictly forbidden—to the point where some schools have policies denying firms who might do so any access whatsoever to that school’s OCI season.

All of this is the enemy of thoughtful, considered decision-making. Yet it endures because the schools organize and control it. As one career services dean said last month, “It works perfectly for us; I’m sorry it’s so hard on the firms, but so be it.”

Read that again.

Would it be rude for us to point out that the only genuine parties in interest to law firm/law student recruiting are law firms and law students?   Yet schools have hijacked the entire process and assumed the mantle of gatekeeper.

In a word, OCI has become of, by, and for the law schools. That “it’s so hard on the firms,” who are actually offering the jobs, is inconsequential collateral damage. The world has been turned upside down.

Now, having law schools in control might be theoretically acceptable if they were Solomonic advocates of a frictionless process featuring transparency, efficiency, full and open disclosure, cost-effectiveness, and careful, considered, truly thoughtful decision making.  They have proven anything but.

Is there a way out?

Alas, not an easy one.

The structural reality is that students and law firms face a “collective action” challenge. Being the first firm to challenge a school’s OCI strictures will probably reward you with being shut out of OCI at that campus, which is almost automatically a “no go” for convention-following law firms.  But if three, or five, or a dozen firms were to confront School X and demand a saner way of doing things, you know that School X would talk; the logjam would be broken once and for all.

So this is what it comes down to:

  • Schools, especially those in the Top Tier, think things are working “perfectly“;
  • They won’t change unless forced to;
  • Firms could force change;
  • But their deep-seated risk-aversion has, so far, postponed that day.

Firms drastically underestimate their power in this scenario.  (Did we mention they are the ones offering the jobs?) Imagine if School X threatened to shut out a few super-prestigious firms: How well would that be received by students, alumni, and readers of The New York Times (don’t kid yourself—this type of behavior, in this economy, would be extremely juicy mainstream media news).

We talked about supply and demand above, but condensing the law firm business model into a sound bite: Clients are your demand, talent is your supply.

Schools are trying to wrest away control of your supply.

I think schools are bluffing. Who’s ready to call them on it?

 

 

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3 Comments


  1. JR, 2 years ago Reply

    I think prospective and current students need to be realistic about the opportunities that truly exist when they graduate.
    I think if you are a 1 or 2L that is not in the Top 1/3 of your class, it’s better to drop out at this point.


    • Bruce, 2 years ago Reply

      It would be convenient if one-size-fits-all rules could make the “do I stay or do I go?” decision, but I’m afraid it’s not that simple.

      Some people would certainly subscribe to the “Top 1/3″ rule; others would say “Top 1/3 at a Top XX school,” others would throw in a maximum tolerable student loan/debt cutoff, etc.

      If there are folks in the audience staring squarely in the eye of this decision, one of the most promising sources of nuanced advice for this extremely complex decision will almost surely come from Prof. Paul Campos (U. Colorado Law), writing on “Inside the Law School Scam.” See this post for his first in the series:

      http://insidethelawschoolscam.blogspot.com/2012/07/should-you-stay.html


  2. Hugh M., 2 months ago Reply

    The total disconnect of all Higher Education faculties from the realities of the workplace, namely little or no demand for many majors, has existed for decades. Further, the phenomenon of HE faculties disconnects carries over to the pricing of their services without any regard to the real world demand for their output. Faculties have always will live in ivory towers, but that may be coming to an end as the buyers move toward higher paying skilled careers.


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