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Wednesday, July 17, 2013

What Is the Economic Value of a Law Degree -- $1 Million?

One MillionMichael Simkovic (Seton Hall) & Frank McIntyre (Rutgers Business School), The Economic Value of a Law Degree (PowerPoint):

Legal academics and journalists have marshaled statistics purporting to show that enrolling in law school is irrational. We investigate the economic value of a law degree and find the opposite: given current tuition levels, the median and even 25th percentile annual earnings premiums justify enrollment. For most law school graduates, the net present value of a law degree typically exceeds its cost by hundreds of thousands of dollars.

We improve upon previous studies by tracking 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 also include unemployment and disability risk rather than assume continuous full time employment.

After controlling for observable ability sorting, we find that a law degree is associated with a 60 percent median increase in monthly earnings and 50 percent increase in median hourly wages. The mean annual earnings premium of a law degree is approximately $53,300 in 2012 dollars. The law degree earnings premium is cyclical and recent years are within historic norms.

We estimate the mean pre-tax lifetime value of a law degree as approximately $1,000,000.

Update #1:  Michael Simkovic (Seton Hall), Above the Law Needs to Read More

Update #2: 

https://taxprof.typepad.com/taxprof_blog/2013/07/what-is-the-.html

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Comments

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/18/ignore-the-haters-law-school-is-totally-worth-the-cash/


Some quick calculations from their reported numbers (disclaimer, I didn't read the full study):


Median increase in career earnings for JD vs BA = $610 pre-tax 2012 dollars


Median post-tax increase in earnings (assume 30% rate on the extra income) = $425k


Cost of 3 years tuition= $180k post-tax 2012 dollars


Cost of interest on 250k loan (I'll include the interest on loan to cover the $70k Cost of living in LS, but not the COL itself) in 2012 dollars (assume 7% interest, less 2% for inflation, 20 year repayment on monthly repayment schedule)= $145k


Total post-tax cost of LS in 2012 dollars= $325k


Post-tax net increase in lifetime earnings- median JD vs BA: $100k

If I run this again using the 25th percentile JD- which is probably more accurate, beacause a median BA is probably about a 25th percentile JD (given the discrepancy in median UG GPA and LSAT scores between the two groups). If we assume median JD earner is approximated by the median GPA/LSAT of a median law school (~100 ranked school), we're talking about a person with something like a 3.4 GPA and a 157 LSAT (70th percentile). The median graduating GPA of a BA holder in the US is probably more like 3.1-3.2, and the median score of the LSAT is a 151. So, I think we safely can assume that the median JD is morequalified than the median college grad.


25th percentile Increase in career earnings for JD vs BA = $350k pre-tax 2012 dollars

Median post-tax increase in earnings (assume 28% rate on the extra income) = $250k

Cost of 3 years tuition= $180k post-tax 2012 dollars

Cost of interest on 250k loan (I'll include the interest on loan to cover the $70k Cost of living in LS, but not the COL itself, since living expenses would be paid regardless of being in LS or the work world) in 2012 dollars (assume 7% interest, less 2% for inflation, 20 year repayment on monthly repayment schedule)= $145k

Total post-tax cost of LS in 2012 dollars= $325k

Post-tax net DECREASE in lifetime earnings- 25th percentile JD vs BA: $ -75k


Posted by: anon | Jul 19, 2013 1:04:20 PM

Radical skepticism? Do my own study? My critiques were well-reasoned and thoughtful. My fourth critique was admittedly aspirational. If you can only critique work with new studies, we should probably close down the entire Law Prof Blog network and similarly end university symposia. For the sake of legal academia, I hope you two aren't professors anywhere.

Posted by: HTA | Jul 18, 2013 1:15:19 PM

HTA - maybe you should do you own study, if you disagree with the methodology so much. That is how science happens, as opposed to just complaining about it. (See PresTTTige)

Posted by: Anon | Jul 18, 2013 6:16:23 AM

At first I thought the title posited that the value of a law degree was negative $1 million.

Posted by: AMTbuff | Jul 18, 2013 2:25:36 AM

Hey HTA, regarding Points 3 and 4: they controlled as best labor economists can for "ability sorting."

But if you're still committed to radical skepticism, be sure to bring that to the scamblog claims, too.

Posted by: Smithy | Jul 17, 2013 5:21:48 PM

Three questions/comments without digging into the study:

(1) Why do the authors assume pre-2008 graduates are similar to post-2008 graduates? The market fell out in that year and its logical to assume that graduates post-2008 would have more trouble finding their first job. Many recent graduates have been excluded from the legal market. They may never get a legal job.
(2) The comparable doesn't seem right. Don't compare JDs to BSs or BAs. Compare JDs to other post-graduate alternatives.
(3) There's an inherent selection bias. Even fourth-tier law schools reject candidates for bar failure risk. JDs are on average going to be a bit brighter than the pool of BAs and BSs.
(4) Your best bet is to compare people that were accepted to law school and declining to attend with those accepted and choosing to go. That's probably impossible to do.

Posted by: HTA | Jul 17, 2013 4:32:20 PM

Step One: Get JD, preferably at Hahvahd like Simkovic
Step Two: Publish B.S. studies on value of JD
Step Three: Profit

I stopped putting my JD on my résumé a long time ago, after reaching a conclusion completely different from the authors'.

Posted by: PresTTTige | Jul 17, 2013 3:42:10 PM