Class of 2007: A More Extreme Bi-Modal Distribution

[By Bill Henderson, cross-posted to ELS Blog]

NALP just published its 2007 edition of Jobs & JD’s. One topic of interest to students, lawyers, law firms, and legaleducators is the change in salary distribution from 2006 to 2007.  Thenow famous 2006 bi-modal distributionwas vivid evidence that the U.S. legal profession is undergoingsignificant 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 of2007 who reported salary information.  Note, however, that 197ABA-Accredited law schools graduated 43,518 students in 2007.  Althoughwe know the types of jobs taken by 40,416 grads, only 57.7% of thisgroup provided salary information.  If I had to wager on the directionof underreporting, I would predict it was under-inclusive of graduateswith lower salaries and those who did not pass the bar.  Why?  Asidefrom the human psychology that it is easier to share flattering ratherthan embarrassing information, the roughly 7,500 jobs under the secondmode 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 abovegraph, 32.5% of the law graduates took jobs with starting salaries inthe $100K+ range; but the true percentage for the class of 2007 isprobably lower.   Some facts and then one normative observation.  Thefacts first:

More after the jump …

• 91.9% of 2007 graduates were employed 9 months aftergraduation, which compares favorably to 2006 (90.7%), 2005 (89.6%),2004 (88.9%), and 2003 (89.0%).  I would like to believe these numbersare trustworthy. 
• 76.9% were in jobs that required bar passage.  [It would be usefulto disaggregate the jobs in the remaining 23.1% of law schoolgraduates.  Who are these students?  How many entered law school withno 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 reliableguides of future earning power.
• 38% of all starting full-time salaries were less than $55,000 peryear, 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% inBoston 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-modaldistribution is bad for students, bad for law firms, bad for clients,and bad for law schools.  [When I showed the 2007 distribution to onelaw school dean, she shielded her eyes!]:

• Students.  It is bad for students because at $160,000per year, many corporate clients will ask that you not be assigned totheir matters.  And if your initial work experience is document review,a $160K job can quickly become a dead-end because your skill set is notgrowing with your billing rate (avg. 1st yr billing rate in a $160K+ firm is $225 to $255/hr).   So the atmosphere among associates at$160K+ firms is probably becoming more competitive.  It would be betterin the long run to start at $95K, learn your craft, and become a greatlawyer who commands top dollar.  And young lawyers should think longrun.

• Clients.  This is bad for clients because the short termsolution of requesting only midlevels and partners will eventuallyconstrict the supply of incoming legal talent.  When clients and lawfirms try to externalize the cost of mentoring and training–here Imean observation, contact, and feedback from partners andclients–associates are more likely to leave.

• Law Firms.  Actually the bi-modal distribution is onlybad for firms trying to keep pace with the Am Law 200 salary payscale.  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 committhemselves to the future of the firm by spending more time and moneyinvesting in associates.  This will reduce attrition and protect thebrand.   But the $160K+ cost structure provides partners with strongincentives to bill hours rather than investing in the long term futureof the firm.

• Law Schools.  The economics of the bi-modal distributiontake the pressure off elite law schools–indeed, they can raisetuition! Thus, for many law professors, the best outcome is lateralinginto a Top 15 law school.  But more/better law review articles–aprecondition of a lateral offer–is not going to solve the difficultinstitutional problems of lower ranked schools.  Now more than ever,all law faculty members need to understand the structural shifts takingplace in our profession.  When faculty at Harvard and Yale ignore thesechanges, it does not mean that these changes are not important.  Itjust 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 andcoordination/signaling problems.  For example, how a firm gracefullybows out of the salary wars is an immensely difficult problem.  I dothink, however, that permitting nonlawyer investment would provide lawfirms with the financial wherewithal (and psychological courage) toexperiment with more innovation.  And that would be good.  LarryRibstein’s scholarship is now more timely than ever.  See, e.g., here and here.

When I was an interim associate at Sidley & Austin the summerafter the 2000 salary wars, a partner told us that “we are all going tohell” based of the jump in salaries from $95K to $125K.  I now worrythat he may have been right.