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Pepperdine University School of Law

Tuesday, September 3, 2013

Simkovic & McIntyre Respond to American Lawyer Op-Eds on The $1 Million Value of a Law Degree

American Lawyer LogoFollowing up on my previous posts:

American Lawyer:  'Million Dollar Degree' Authors Answer Harper, Leichter, by Michael Simkovic & Frank McIntyre:

For several years journalists at leading publications have reported that enrolling in law school is a bad investment for many and perhaps even most prospective students because of declining starting salaries in the legal industry and data related to the employment status of law grads nine months after graduation.

In our paper, The Economic Value of a Law Degree, we use earnings data from the U.S. Census to investigate the increase in earnings associated with a law degree compared to a bachelor’s degree. Our results suggest that the press mistook a generally weak labor market and high unemployment among the young for a law-specific problem. We find that at current tuition levels and student loan interest rates, the median and even 25th percentile earnings premiums confer advantages that exceed the cost of a law degree by a wide margin. After controlling for observable ability sorting, we find that a law degree is associated with a 60 percent median increase in monthly earnings.

The mean annual earnings premium of a law degree is approximately $53,300 in 2012 dollars. Even toward the lower end, the annual premium is still $17,300 over a bachelor’s degree. For most law school graduates, the net present value of a law degree over a lifetime typically exceeds its cost by hundreds of thousands of dollars.

In a column published on July 25, 2013, Am Law Daily contributor Matt Leichter repeated many misrepresentations of our research that originally appeared on Above the Law—even after Above the Law posted corrections to its article and after we refuted many of these misrepresentations. A second Am Law Daily contributor, Steven Harper, made many of the same mistakes in a column published the following day, and threw in a few disparaging remarks to boot. We’ve discussed many of these errors in a separate piece, but the clearest refutation would be to simply read the paper. ...

Everyone will experience recessions during their lifetimes. The more important question is if the law degree premium will decline, increase, or remain the same over time. We know from the data that there has not been much of a long-term trend in the 16 years from 1996 to 2011, though the premium does fluctuate from year to year. Some have suggested that the last few years saw an unprecedented collapse in the employment market for law degree holders. And indeed, the broader U.S. labor market has seen declines in recent years. However, in relative terms, the law degree earnings premium, which incorporates unemployment risk, appears to be close to average. That is, many people are suffering, but law degree holders have maintained their relative advantage.

... What does all this say about law school reform? On the one hand, untested reforms should not be rushed through primarily based on a sense of desperation or crisis, or a belief that changes couldn’t possibly make things any worse. On the other hand, the high returns to law school do not suggest that legal education can’t be improved—some reforms may be beneficial, and should be considered on their merits. Our preference, as always, would be to test proffered theories empirically as best as possible and we look forward to future work that does.

Update:  Harper and Leichter respond:

Legal Education | Permalink


I tried posting this at American Lawyer, but the comments there are super-wonky today.

- No data from graduates later than 2008, right when the market turned. Five years (and counting) of horrible job outcomes, with the BLS not expecting things to get any better before 2020. So, 2008 through 2020: that’s 12 years of data, nearly as long as Simkovic’s study. Gosh, it’s almost as if a future Simkovic would have an entirely different set of conclusions!

- As many, many people have pointed out, it is a false equivalence to compare the 25th percentile of law school earnings to the 25th percentile of undergrad earnings. The former would have vastly outperformed the latter in undergrad. It would be more honest to compare JD outcomes to MBA and other graduate school outcomes, while taking into account the cost of a JD compared to those other graduate programs.

- "Evidence" that the downturn in legal market is cyclical and not structural is BY FAR the weakest section of the paper, and flies in the face of literally everyone else commenting on the legal industry, including designated cheerleaders ABA and NALP. There is little more than flimsy personal assertions that *prove* that the massive changes in the legal industry are cyclical, and as soon as the economy gets better, the LPO's and predictive software and reallocation of legal work to everyone from compliance officers to real estate agents to legalzoom will just vanish. People will happily pay a premium for licensed attorneys to do piecemeal, commoditized work, because, well, uh, I don't know. The paper whiffs on this one. And stable for four decades! It's a mug's game for anyone to make predictions that far out. If you don't believe me, check out what happened when ATT hired McKinsey (Simkovic's first employer, btw) in the early 1980's to predict how large the global cell phone market would be in 2000. I believe they were off by more than 36,500% (i.e. their prediction was less than the daily number of new cell phone subscribers in 2000).

Also, there is no discussion of how the recession's impact on the general population has and will continue to affect the market for legal services. After all, lawyers need solvent clients to have solvent practices. This point seems utterly lost on the one-year veteran of Davis Polk. The middle class has lost 40% of its household wealth.

- No calculation of student loans in the earnings premium - at least, not in any of the big shiny numbers that the report highlights. And one cannot help but notice that Figure 1 of the paper shows essentially flat wages for the 10th, 25th, 50th, and 75th percentile wages of attorneys since 1997, in 2012 dollars. Of course, the cost of attending law school has increased a few hundred percent, in 2012 dollars, since 1997, and continues its skyward ascent untroubled by the devastation it wreaks. The authors come close to eighty-sixing their own argument with the inclusion of their first figure. As a free editorial tip, I'd suggest excising that particular chart.

- No calculations of lost wealth vis a vis spending on student loan payments and interest instead of building retirement savings and home equity. A recent labor economics report out of Demos concludes that a couple who each possesses the average student debt load of $27k ($54k total) will lose approximately $208,000 in lifetime household wealth versus their peers without student loans, due exactly to lower retirement savings and home equity – and this is under a best-case scenario where neither every experiences unemployment and spends their working lives in college-level jobs with annual wages. If we were to scale that up to the average lawyer couple each owing $125k (plus undergrad loans), well, that would eat up most of the average earnings premium and come out negative for lesser earnings premiums. It’s all well and good to have a six-figure lifetimes earning premium, but what is good for the goose is good for the gander: include the student loan payment premiums and their lifetime effect on household wealth. Anything less is sophistry at best, openly dishonest at worst.

- No discussion of whether income-based repayment might be repealed. One should note that Rep. Thomas Petri (R) of Wisconsin is on a crusade of sorts to repeal PSLF. Barclays estimates that IBR/PAYE will cost $190 billion just through 2020, making it a very likely target of any future austerity-minded administration or Congress. Of course, the very existence of IBR/PAYE/PSLF represents a structural change in the marketplace, as they did not exist six years ago (and may not exist in another six years). As a 2007 graduate of Harvard Law School, Simkovic just missed the GradPLUS gravy train if he financed his education, and would likely owe six figures in private student loans (HLS in 2007 was roughly $68k, and one could borrow a max of $20.5k per year in graduate Stafford Loans, so that's >$120k in private loans before we talk bar exam expenses or undergrad debt), so he probably knows exactly what I am talking about here. If he had only graduated two years later, all of his loans could have been federal and eligible for IBR/PAYE. And contrary to his happy assertions of everything coming out wine and roses, here’s a downgrade of some SLABS offered by Access (largest private lender for law schools and other graduate programs, and actually owned by the 201 accredited law schools). Fitch is downgrading its SLABS (Student Loan Asset-Backed Securities) because it believes the default rates on the underlying private student loans will top 16%, and the realized collection rate on those defaulted loans will only be around 30% - meaning that those defaulting lawyers are stone broke. Historically, between ½ and 2/3 of Access’s annual loan originations were to law students, so this is a decent indicator of how they fared in the job market.

- Frankly, Simkovic doesn’t answer any of Stephen Harper's substantive criticisms of his paper (beyond taking hollow umbrage in Harper’s “tone”), and given that Harper has worked in large law firms about as long as Simkovic has been alive, I'd take his expertise over the one-and-done law professor whose job may be cut next year because his employer (Seton Hall Law) can no longer lure enough prospective students to pay their untenured faculty.

I could go on, but I have to prepare for a rare interview. For an internship. Not in the legal profession. Offering a service-sector wage. Until then, I remain

Unemployed Northeastern
Attorney, alumnus of one of the best liberal arts colleges in the United States, and one of America’s tens of thousands of un/underemployed law school graduates

Posted by: Unemployed_Northeastern | Sep 3, 2013 10:32:53 AM