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Saturday, November 1, 2014

Simkovic & McIntyre: The Economic Value of a Law Degree: $1 Million

Michael Simkovic (Seton Hall) & Frank McIntyre (Rutgers Business School), The Economic Value of a Law Degree, 43 J. Legal Stud. 249 (2014):

We investigate the economic value of a law degree and find that for most law school graduates, the present value of a law degree typically exceeds its cost by hundreds of thousands of dollars. The median and 25th-percentile earnings premiums justify enrollment. We track lifetime earnings of a large sample of law degree holders. Previous studies focused on starting salaries, generic professional degree holders, or the subset of law degree holders who practice law. We incorporate unemployment and disability risk and measure earnings premiums separately for men and for women. After controlling for observable ability sorting, we find that a law degree is associated with median increases of 73 percent in earnings and 60 percent in hourly wages. The mean annual earnings premium is approximately $57,200 in 2013 dollars. Values in recent years are within historical norms. The mean pretax lifetime value of a law degree is approximately $1 million.

From Michael Simkovic:

Here's a description of some of the changes to the final version compared to the last working paper:

We updated the SIPP data through 2013 (we have partial data for 2013, but seems to be about as good as full year).

The other changes are all pretty minor. The one to note is probably the instrumental variable literature review under (2).

The other changes we made, besides updating to 2013, are:

(1) Imputation and data quality improvements

We got rid of horizontal imputation, where the census fills in missing months of earnings data based on earnings of other people with similar demographics (race, sex, full or part-time work status) and instead we impute vertically, based on the months that come before and the months that come after, for that individual. This makes more sense than the census method, because census is imputing data based on other people with different levels of education.

We increased the quality of the data we used by eliminating "imputed" law degree holders (i.e., people who didn't necessarily say they were a law degree holder but the census filled it in) and requiring law degree holders to also report having a professional degree.

These changes increase the annual earnings premium a little bit. It's about $57,000 per year on average, now, as opposed to around $53,000 before. There were also increases in the annual percentage earnings premium and percentage wage premiums, and in the earnings from the quantile regression estimates (25P, 50P, 75P). See also number 3.

(2) Robustness

We added lots and lots of robustness checks, including checking for the spread of the earnings premium widening over time, which we did not find evidence of.

We also included additional information about instrumental variable (IV) studies (high tech methods of teasing out causation from observational data), the results of which suggest that OLS (the lower-tech technique we use) generally produces good estimates of the causal effect of education on earnings. Most studies actually produce higher estimates using IV than using OLS, so if we'd used a higher tech method we might have gotten a higher earnings premium. Twin studies generally suggest a slightly lower estimate than OLS. So based on what others have found in the literature, IV would probably be higher; twins would probably be a little lower; overall we've probably got a pretty good estimate.

(3) Quantile regression age groups

We replaced our 5-year age group dummy variables with a quadratic term for age in the quantile regression (this is a standard technique in labor econ). There were too many dummy variables in the quanitle regressions before. The quadratic works better and still reflects the non-linear nature of the age earnings relationship (i.e., initially earnings increase with age; then they decrease with age).

(4) Gender Break down

We include more info broken down by gender. For the quantile regressions and lifetime value of earnings, the men have a bigger spread than the women. So the 25th P for women is higher than the 25th P for men, and the 75 P for men is higher than the 75 P for women. On average, the present value of the earnings premium is about the same for men and women, because the law degree increases work hours for women more than for men.

(5) Sensitivity Analysis

We noted that with a 9 percent nominal discount rate, a 25th percentile man might not get a good private return on a law degree (at least not without IBR with debt forgiveness). We don't think this discount rate makes much sense--we use 6 percent nominal as our base case--but that's the way the numbers work out.

(6) Trend

We see a decline in the point estimate of the earnings premium from 2008 to 2013. In 2013, the point estimate was at about the average level from 1996 to 2013. In 2008, it was way above average, so it looks like mean reversion.

(7) Other

Most of the rest is just changes in tone and cutting things to save space, plus updating to the latest available data, usually 2013, sometimes 2012.

Stephen F. Diamond (Santa Clara), Leading Study of JD’s Million Dollar Value Published in Journal of Legal Studies:

As the economic recovery from the collapse of the 2008-10 period continues its momentum there is some evidence that applications to top tier JD programs remain strong with applicants with very LSATs now having increased. Nonetheless, second and third tier schools remain challenged to survive the prolonged economic cycle. This study, however, is likely to reinforce the argument that the JD and law schools remain a viable and important economic institution.

Legal Education, Scholarship | Permalink


Well, sir, there's nothing on earth
Like a genuine, bona fide
Electrified, six-car monorail
What'd I say?

What's it called?
That's right! Monorail

Posted by: terry malloy | Nov 3, 2014 8:30:47 AM

In other news, a 1958 labor economics study concerning longshoremen that concerned itself with their growth from 1900 to 1954 would find that their wages steadily increased, as ports grew, countries developed, and trade became more international in nature, and conclude nothing but clear seas ahead for the future. Unfortunately, the 1955 advent of standard intermodal containers by Malcolm Maclean would render all of that moot and put millions of longshoremen around the world out of work permanently. And so it is with high-paying legal work in the post 2008 world. In both cases, the math and modeling of the study may (or may not) be correct, but the conclusions are completely contrary to reality.

M.S., stop beating this dead horse and release your study about ongoing Lumina-SLM ties already.

Posted by: Unemployed Northeastern | Nov 3, 2014 9:28:13 AM

One million dollars over what, 30-40 years?

Doesn't sound so great to me. A better analysis would compare this to other degrees earned, such as RN, engineer, or other professions. Then throw in skilled trades.

1million/30 years is 33 k a year. 1 million divided by 40 years is 25 k. Then figure in the cost of student loans over that time.

Go be a plumber.

Posted by: Dantes | Nov 3, 2014 5:23:12 PM

Read the study and then read about “present value” in an introductory finance book.

It’s not $1,000,000 spread over 40 years. It’s around $60,000 extra per year over 40 years. In other words, it’s around $2.4 million spread over 40 years.

After discounting this back to present value as of the start of law school, it works out to the equivalent of an immediate lump sum payment of $1,000,000.

Steve Harper made the same mistake.

You can’t compare a law degree to a profession. You can only compare a law degree to another education or training or certificate program. Just like many law graduates don’t become lawyers (40 percent according to S&M), many students in these other programs don’t work in the field of their degrees or certificates.

Engineering and nursing undergraduate majors are represented in S&M’s comparison group to the extent that they go on to law school, since S&M match on major.

The lucky few plumbing certificate program graduates who manage to make it as plumbers or pipefitters are still only making less than half as much as lawyers—when they can even find work.

But if plumbing fills you with joy and happiness, by all means, make the financial sacrifice and attempt to become a plumber.

Posted by: Math | Nov 4, 2014 7:33:39 AM

Unemployed Northeastern--the study includes data from 2008 to 2013, so it reflects the post 2008 world. The authors found that it's the same, on average as the period from 1996-2013. So try another argument, publish a better peer reviewed study, or just be honest enough to admit that you've been wrong all along.

Posted by: Math | Nov 4, 2014 8:12:15 AM


1. The study does not include any salary information for law school graduates from the classes of 2008 through 2014, which is a period about 40% as long as the cohort in their study (mid-90's through 2007). *Coincidentally,* that is when law school grads' prospects and salaries fell off a cliff. One feels obligated to note that even in BigLaw, market rates have not budged in nearly a decade now while average law school loan balances have increased more than $50,000. The exit options for BIgLaw associates outside of tippity-top Vault firms have diminished significantly, too.

2. This study is not peer-reviewed, so why would I need a peer-reviewed study to refute it? And no, sending advanced copies of your paper to a few colleagues is not actually peer review, social science-background law professors.

3. Steven Harper, who you denigrate upthread, has significantly more economics training (MS in economics v. BA in economics) and law profession experience than M.S. (>30 years practice vs. 1 year's practice). For expertise, it's generally best to go with the person who actually has it.

4. I argued the merits of this study here and elsewhere at length last year and have not the patience to rehash the same old arguments. But many of the underlying assumptions in the S&M study are simply incorrect or misguided, from the improper comparison of earnings v. a BA/BS instead of MBA/MD/etc to the assumption that the 25th percentile of law school grads are the same cohort as the 25th percentile of college grads to the tens of thousands of dollars every law student in the study is presumed to earn over 1L and 2L summers (HLS confirmation bias alert!) to the grossly underbaked law school loan averages, their treatment in the wage premiums, and the very real possibility that PAYE and PSLF may be repealed in the near future. Beyond that, labor economics by its nature flounders when presented with permanent structural change in the cohort/industry/country/etc it is studying - and even the ABA and NALP are admitting that the profession is undergoing permanent, structural change. The only ones denying it are S&M - because it would render their work moot.

Posted by: Unemployed Northeastern | Nov 4, 2014 9:07:37 AM

@ Math



Posted by: terry malloy | Nov 4, 2014 9:32:20 AM