The Growing Lawyer Bubble – The Ugly Truth About the Law Market

steven j harper and the lawyer bubble

steven j harper and the lawyer bubbleSteven J. Harper is an adjunct professor at Northwestern University and author of The Lawyer Bubble: A Profession in Crisis (Basic Books, April 2013), and other books. He retired as a partner at Kirkland & Ellis in 2008, after 30 years in private practice. This article appeared in The American Lawyer.

In June the legal services sector lost more than 3,000 jobs, according to the latest Bureau of Labor Statistics data. Since June 2012, the latest BLS data shows, the industry has seen a net gain of only 1,000 jobs. In the last two months alone, 6,000 positions disappeared.

No Market Solutions Here

In a properly functioning market, reduced demand would prompt suppliers to cut output in search of equilibrium. But the legal profession is anything but a functioning market. In fact, it consists of several distinct and dysfunctional markets.

For example, there’s plenty of unmet demand for lawyers on the part of people who can’t afford them, and reduced federal funding for the Legal Services Corporation has only exacerbated that problem. So has the rising cost of law school tuition and the resulting explosion of student debt. Over the past 25 years, law school tuition increases have far outpaced the rising cost of other forms of higher education.

In another segment of the market, demand for corporate legal work has remained flat for years. But law school business models generally have focused on filling classrooms, regardless of whether students will ever be able to get the high-paying jobs they need to repay their six-figure educational loans. Because most tuition revenue comes from federally guaranteed loans that survive bankruptcy, schools have no financial incentive to restrict enrollments—that is, until they run out of applicants.

When might that happen? Not soon enough, despite recent headlines that imply otherwise.

High-Profile Reductions in Class Size

Some schools have reduced the sizes of their entering classes. The University of the Pacific McGeorge School of Law, for example, announced this month that it is reducing enrollment from the current 1,000 to about 600—an impressive 40 percent drop.

But as Dan Filler observed on the Faculty Lounge blog, the reality may be less impressive. Although McGeorge graduated 300 would-be lawyers annually from 2010 through 2012, its first-year enrollment hasn’t kept pace with those numbers. In 2012, the school had 248 (day and evening) first-year students. In 2011, it had 215. A normalized class enrollment of 200 would be a 20 percent reduction from recent levels. That’s positive, but as explained below, not nearly enough.

About Those Declining Applications

A recent Wall Street Journal article about the “plunge” in law school enrollments noted that “applications for the entering class of 2013 were down 36 percent compared with the same point in 2010.” But a more relevant statistic included in the same story is more jarring: “Last year, law school first-year enrollments fell 8.5 percent nationwide.”

Here’s another way to look at it: In the fall of 2004, law schools admitted 57 percent of those who applied. In the fall of 2012, almost 75 percent of all law school applicants were admitted.

About Those Jobs

The increase in the percentage of applicants being admitted to law schools is one reason that the lawyer bubble continues to grow. Another is the stagnant job market. In 2008 the BLS projected that the economy would add a net total of 98,500 new attorney positions for the entire decade ending in 2018. In 2010, the agency revised that estimate downward to project the addition of just 73,600 positions by the end of 2020.

Even allowing for attrition by retirement, death, and other reasons, the BLS now estimates that there will be 235,000 openings for lawyers, judges, and related workers through 2020—23,500 a year. Last year alone, law schools graduated 46,000 new attorneys.

If law schools as a group reduced enrollments by 20 percent from last year’s graduating class, they would still produce almost 37,000 new lawyers annually—370,000 for a decade that will require only 235,000 — not to mention the current backlog that began accumulating even before the Great Recession began.

One More Thing

This all takes us back to the University of the Pacific McGeorge School of Law. According it its ABA submission, only 42 percent of its class of 2012 graduates found long-term, full-time jobs requiring a JD. Even if the school caps entering classes at 200, its resulting placement rate would rise to only 64 percent.

U.S. News rankings considerations loom large in all of this. Law schools fear that reducing LSAT/GPA admission standards would hurt their rankings. In that respect, McGeorge’s class size announcement overshadowed a more unpleasant disclosure that new ABA rules now require: scholarship retention rates.

Many law schools try to enhance their U.S. News rankings by offering entering students with high LSATs so-called merit scholarships. But those scholarships sometimes disappear in years two and three. According to Professor Jerry Organ’s analysis, only 42 percent of students entering McGeorge in the fall of 2011 kept their first-year scholarships. Eleven schools (out of 140 that offered conditional scholarships) fared worse.

The overall picture is ugly. Some schools are laying off faculty and staff to counter the financial impact of reduced enrollments. But they’re also keeping tuition high and spending money on scholarships tied to high LSATs that disappear after the first year, presumably to be replaced with nondischargeable loans. Meanwhile, almost all of today’s students are incurring staggering educational debt, but many of them won’t find jobs sufficient to repay it.

That’s not a march toward market equilibrium. It’s a growing bubble.

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