Thursday, July 25, 2013
Rasmusen: Critics of The Economic Value of a Law Degree Are Making the Paper Better
Eric B. Rasmusen (Indiana University, Kelley School of Business), Critics of The Economic Value of a Law Degree Are Making the Paper Better:
The Economic Value of a Law Degree by Michael Simkovic and Frank McIntyre (S-M) has attracted a lot of negative comment, which is good. Knowing Prof. Simkovic a little, and knowing that Prof. McIntyre is an economist, I am confident that they agree in welcoming the negative comment. When a scholar comes up with a conclusion contrary to the conventional wisdom, the proper response is skepticism. This can take two forms. One is dismissal without reading the paper, because you assume there’s a mistake. The other is extra-careful reading, to try to find the mistake you’re sure is there. Their paper has gotten a lot of careful reading, and it is making the paper better. The referees of economics journals are tough, so this is a good thing for them. As in the courtroom, it’s best to find out your weak points in advance, admit them, and address them as best you can before the other side gets a chance.
The idea of the paper is simple, really: Use government earnings data to see how much more people with law degrees earn over their lifetimes compared to similar people who didn’t get law degrees. The hardest part is to find “similar people”. We can compare male history majors who did and who didn’t get law degrees, but we don’t know whether the ones who chose to go to law school are better or are worse. If the ones with law degrees earn more at age 50, that might be because the smartest and most ambitious were the ones who went to law school and law school itself made no difference. On the other hand, maybe the laziest and most disorganized male history majors went to law school, because they couldn’t or wouldn’t find a job right out of college. This is the study’s main problem, but note that this problem might mean that S-M have underestimated the value of a law degree, not overestimated it.
A lot of the immediate reactions to the paper misinterpret it, though, and the results aren’t as surprising or revolutionary as they seem. Let me go through a few points.
1. They are looking at the value of a law degree, not the value of being a lawyer. A big part of what they are addressing is not how much lawyers make, but how much the actual education you get in law school helps you think. We business-school professors often scoff at the value of our degree too, but then I go teach an MBA class and realize how muddled students are on ideas such as “Money now is worth more than money later” or “Don’t keep going with a project just because you’ve already spent so much on it”. I also see how poorly MBA students use their brains, even after five or so years of job experience. I admire how the first year of law school teaches people how to think. Liberal arts majors learn how to use chains of reasoning, and STEM majors learn that logic works with words as well as numbers. Thus, it isn’t clear that the J.D. who can’t find a law job has wasted his time in law school.
Indeed, maybe that J.D. will do better than his friend who does get a law job. I didn’t go to law school, but college roommate did. As a partner at Baker and Botts, he probably earns over five times my salary. But he’s made a big sacrifice in picking that career. I don’t mean the time and strain of midnight toil preparing bond deals--- young professors work hard too. No, like me he picked a career based on what he liked rather than on money, because he could have gone into investment banking. By choosing Big Law, he’s sacrificed at least a million dollars per year year (see “Wall Street and Main Street: What contributes to the rise in the highest incomes?” S. Kaplan, J. Rauh, Review of Financial Studies, 2010.) If he couldn’t have gotten a law job, perhaps he would have had to settle for Wall Street. Similarly, John Doe, B.A., chooses between becoming a bank loan officer and earning $70,000/year in mid-life or getting a J.D that gives him the credential and mental training to be an attorney at $90,000/year or a real estate developer at $110,000/year.
2. They are looking mainly at the benefit of a law degree, not the benefit minus the cost. It would be strange if having a law degree actually reduced your earning ability. True, if you get a law degree and then insist on a law job, you may end up unemployed. But surely employers in non-law jobs would prefer you to a fresh college graduate.
The question is whether the benefit of the law degree is worth the cost. That depends on three things: tuition, lost wages, and the rate of return on investment. Tuition is the least important. Even if you are paying $30,000/year, that is less than the wages you are losing by studying instead of working. (I couldn’t find the wage levels S-M use in the current version of their paper for the cost estimates; they should clarify that.) What is most important is the rate of return on investment. S-M use an after-inflation rate of 3%, which is a good choice. The rate is important because the key calculation is whether a cost at the start (tuition and lost wages) is worth a return later on (the post-JD wage premium). If you could get a return of 8% by investing the tuition plus 3 years’ wages in the stock market instead of going to law school, then law school would not be as good an investment as if we use a return of 3%. The real return on the stock market 1970-2007 was indeed about 8% (see Table 4.4), but that included a big risk premium (the safest investments only yielded 1.3%) and for various reasons I’d expect future stock returns to be less than they were in the past.
3. If a lot of the benefit of law school is flowing to non-lawyers, that has implications for what law schools teach. A common response to the depressed law market is to say that law schools should teach more practical lawyering skills instead of how to analyze appellate opinions, use history and economics, and make good policy. If there are fewer legal jobs, though, teaching more practical skills doesn’t make sense. Teaching a student how to take depositions or fill out forms isn’t going to increase the demand for lawyers. In fact, those skills are useless if the student isn’t going to end up in a law job. For students who don’t find law jobs, skill at reasoning, bringing different disciplines to bear on problems, and designing incentives may be just what they need. If a student is going to fail in the legal job market then what he needs is less practical training, not more.
- ABA Journal, Is a Law Degree Really Worth $1M? Law Prof Says Value Overstated; Study Author Defends Stats
- Jonathan H. Adler (Case Western), Debating the Value of a Law Degree
- Dan Filler (Drexel), The Long-Term Value Of A JD: Michael Simkovic Gets Very Serious
- Stephen J. Harper (Northwestern), The Dangerous Million-Dollar Distraction
- Jeff Lipshaw (Suffolk), The $1,000,000 Law Degree Kerfuffle: Getting in Touch With My Inner Kahneman
- New York Law Journal, A Law Degree Is Still Worth a Million, Earnings Study Shows
- Frank Pasquale (Maryland), Simkovic's Response to Tamanaha on "The Economic Value of a Law Degree"
Prior TaxProf Blog coverage:
- What Is the Economic Value of a Law Degree -- $1 Million? (July 17, 2013)
- More on The $1 Million Value of a Law Degree (July 18, 2013)
- NY Times, WaPo, Others Debate The $1 Million Value of a Law Degree (July 18, 2013)
- What Is the Economic Value of a Law Degree -- $1 Million or $100,000? (July 19, 2013)
- More on The $1 Million Value of a Law Degree (July 20, 2013)
- Merritt on The $1 Million Value of a Law Degree (July 21, 2013)
- Diamond on The $1 Million Value of a Law Degree (July 22, 2013)
- Tamanaha: How 'The Million Dollar Law Degree' Study Systematically Overstates Value (July 23, 2013)
- Tamanaha: How the 'Million Dollar Law Degree' Study Understates Risk (Part I) (July 24, 2013)
- Tamanaha: Why the “Million Dollar Law Degree” Study Fails (Final Post) (July 25, 2013)
- Pasquale and Simkovic Respond to Tamanaha (July 25, 2013)
- The American Lawyer: Paper on Law Degree's Economic Value a Non-Sequitur (July 26, 2013)
- Simkovic Responds to Tamanaha (Part 3) (July 26, 2013)
- Tamanaha: Short Term Versus Long Term Perspective (July 27, 2013)
- Harper, Diamond: The $1 Million Value of a Law Degree: Distraction, Astronomy, or Astrology? (July 28, 2013)
- Simkovic Responds to American Lawyer Op-Eds (July 29, 2013)
- Diamond Responds to Tamanaha (July 29, 2013)
- Rasmusen: The Economic Value of a Law Degree and the 'Typical' Law Student (July 29, 2013)
- Simkovic Responds to Tamanaha (Part 4) (July 30, 2013)
If you were to compare with what Simkovic and McKntyre did with drug efficacy testing, it would perhaps be like giving the placebos to all thenknown cancer sufferers and only drug being tested to members of the general population - and then saying "wow, looks like it cures cancer, everyone who got the placebo died."
For the comparison to work, you have to compare like-with-like. What I find at this stage very revealing is that this is one of Tamahama's most easily addressable points - they have the data for all the cohorts - but in their steady and defiant defense of their paper this point is never addressed.
Posted by: MacK | Jul 25, 2013 4:40:18 PM
MacK's point seems rather devastating. I can see that it might be hard to find the right control group, but S & M's can't be it. FWIW, Prof. Rasmusen went to a highly-selective college (I'm not knocking him for this, I went to the same one, and I couldn't have gotten into an MIT doctoral program afterwards like he did) where more or less every single person receiving a B.A. could have easily gotten into an ABA-accredited law school had he or she wanted to. Thus, almost everyone who didn't go to law school at some level made a voluntary choice not to go to law school, and striking it rich in investment banking was a perfectly plausible fallback strategy if you didn't want to go to grad school at all. Our B.A.-only classmates were and are not typical of the national B.A.-only pool.
Posted by: JWB | Jul 25, 2013 3:36:30 PM
First, I'll admit I engaged in a bit of hyperbole by stating that a JD is "only useful for jobs in law." There are exceptions, I admit. However, I was challenging the broad statement that "surely employers in non-law jobs would prefer you to a fresh college graduate." That seems generally false--outside of law, and a few law-related fields such as the tax graduates employed by accounting firms, a JD would likely be a detriment rather than a benefit, for the reasons previously identified. Even for those jobs where a JD may be of some benefit, that benefit must be weighed against the loss of three years of earnings and experience, as well as a probable heavy debt load.
Posted by: Jobs | Jul 25, 2013 2:32:34 PM
You neglected to mention what law school the prior two non-lawyers in the presidential election attended. "That was Harvard." That was important information, don't you think?
Posted by: Cent Rieker | Jul 25, 2013 2:05:58 PM
Your point here is at the core of my criticism of the Simkovic paper - that its choice of the control BA-only groups, cohort fr cohort matching with the JD holders is at the core of what is wrong with its analysis. It is also a point that Simkovic & McIntyre have wholly failed to answer, even though they have the data sets to do it easily.
For those who have not read the paper, what Simkovic & McIntyre did was take the data set for college degree only holders, as divided into earnings quartiles and compare the bottom 25% of the BA holders with the bottom 25% of JD holders. The problem with this assumption is that law schools are selective to the point that until 2008 it was unlikely that anyone getting into law school did not have at least a B/B+ GPA, college completion in 4 years or less, selective college undergraduate degree, and a highish LSAT score - Seton Hall students (where Simkovic teaches) even today have a B+ GPA and LSAT score in the upper quartile of LSAT takers, and this is after lowering its admission criteria. Most law students also come from middle class backgrounds.
Thus as has been pointed out by numerous commentators, the choice to compare the bottom quartile of JDs with the bottom quartile of BAs, and to continue this way, quartile for quartile would seem to totally undermine the results that the Simkovic and McIntyre paper claims. Even at the high end, most of the upper quartile lawyers probably need to be compared with the upper 5% of BA only holders. The problem is that for most of their study, doing this would likely show little value or even negative value.
The decision as to to select a control group in this type of study is not a trivial one, it is fundamental to getting a credible result. The odd choice has been raised by many commentators - your don't raise it specifically here, but at least you highlight the issue.
Posted by: MacK | Jul 25, 2013 1:32:23 PM
I think the previous comment may overstate the case, but it is certainly true that many non-legal employers would not prefer a JD to a fresh college grad. And, I think he has correctly identified the reasons why: fear you'll leave once a law job comes along, suspicious that you're looking for a non-law job because you're a washout, and fear that you'll find the job beneath you.
I'd also add that there is another flaw in the study that I don't recall having seen mentioned yet, and that is the comparison of law school grads to fresh college grads. But, that's not everyone who goes to law school; many people attend after having worked for several years in another field. This skews the data in two ways.
First, it underestimates the alternative, non-JD earnings. Someone with 3 years of experience in a job certainly has higher earning prospects than a fresh college grad.
Second, it overestimates the value added for people talking alternative jobs after law school, ascribing that value to the JD when it may be due more to their prior work experience.
Posted by: Derek Tokaz | Jul 25, 2013 12:46:47 PM
"Jobs" should be careful when he accuses others of being "out-of-touch." When I began law school in 1973, the speaker at orientation told us that only half of us would end up as lawyers; the rest, he said, would end up elsewhere. That was 1973. That was Harvard. Our last Presidential election was between two non-"lawyers", both with law degrees -- one the sitting President, the other the former Chair of Bain Capital. In each case, a reasonable return on investment.
Today, I spend much of my time teaching students who plan to specialize in tax. The largest employers of such students are the large accounting firms, none of which hire "lawyers" or engage in the "practice of law." (I am here parroting what they say, not opining as to whether they are in violation of practice-of-law rules.) Last time I looked, KPMG (just one of those firms) employed over 2100 American tax lawyers -- none of whom would be categorized as a "lawyer" for BLS purposes.
Posted by: Theodore Seto | Jul 25, 2013 11:04:12 AM
Right, this is a broadly held assumption that is simply wrong. A JD becomes a stigma when seeking a non law job. It tells employers that this job is your plan B, and that you already failed to achieve plan A.
A good though experiment is to imagine a med school graduate applying for such a job. He's obviously smart and hard working. But that won't be enough to overcome the sense by the employer that there is something obviously wrong with him.
Posted by: Steven | Jul 25, 2013 10:21:51 AM
"But surely employers in non-law jobs would prefer you to a fresh college graduate."
This line shows a bit of an out-of-touch attitude. Employers don't prefer law graduates for non-law jobs, because they assume law graduates really want a law job, and will leave as soon as one becomes available. Or, it is assumed that a law graduate that does not obtain a law job is somehow flawed. Or, it's assumed, possibly rightly, that a law graduate will not be particularly committed to a non-law job, or will have "ideas above his/her station." Not to mention, of course, that non-law jobs will not necessarily pay enough to provide a sufficient return on investment.
A law degree is really only useful for jobs in law--otherwise, three years of work experience would likely be preferable (as well as far less costly). Please stop promoting the lie that a JD is valuable for anything else.
Posted by: Jobs | Jul 25, 2013 9:00:43 AM
I think Seto hits the nail on the head with his Romney example: attributing his earnings to his degree. Such a lack of ability to control for other factors (someone's father) is the perfect example of why this study has little to no merit.
Posted by: Ryry | Jul 26, 2013 10:16:57 AM