Hidden Transformation of the Legal Industry
Richard Sander
Richard Sander is a professor at UCLA School of Law and can be contacted at sander@law.ucla.edu.
Although the American legal industry is enormous—accounting for close to $200 billion in economic activity and employing nearly 2 million people—almost no one is responsible for monitoring its health. Because law firms are always privately held, there are no publicly traded stocks that tell us whether the “law business” is up or down. And because the legal industry is thought capable of taking care of itself (unlike, say, the farming business), there is no federal agency charged with tending to its needs. There is a legal press, but publications such as The National Law Journal and Legal Times tend to pay close attention only to the world of big law firms. As a result, almost no one has noticed a remarkable change. The legal industry as a whole—after a long and phenomenal boom—is in the midst of a serious and prolonged recession.
During the first two-thirds of the twentieth century, the American legal profession was extraordinarily stable. The number of lawyers per capita barely budged from one decade to the next, and most lawyers enjoyed predictably comfortable livings. The larger law firms were growing, but even the largest firm in 1960 had annual revenues of well under $10 million. As late as the mid-1950s, over half of all lawyers were solo practitioners.
Around the mid-1960s, for a variety of reasons too complex to enumerate, all of this changed. Legal activity in the United States began to increase rapidly, and the “legal industry” accelerated into a twenty-five year boom. The proportion of American gross national product (GNP) accounted for by lawyers’ offices tripled between 1967 and 1992. The number of students graduating from American law schools nearly quadrupled. By the end of this era, the largest law firms were approaching half a billion dollars in annual revenue. The number of lawyers leapt from 250,000 to nearly 850,000. By 1992, solo practitioners accounted for only about one-tenth of all lawyer revenues.
For the legal industry as a whole, growth began to decelerate in the late 1980s. The share of American economic activity accounted for by the legal industry peaked in 1992 at 1.55 percent of GNP; today, the share is around 1.45 percent. The percentage of lawyers in the American workforce peaked around the year 2000. And since 2004, according to the latest census data, the absolute number of people listing “lawyer” or “attorney” as their primary occupation has been falling. Yet the production of new lawyers by law schools exceeds—by a factor of three or four—the number of lawyers reaching retirement age. Therefore, a declining lawyer population means tens of thousands of attorneys are exiting the profession in their prime.
Almost no one has noticed this trend because so far it has not had a visible impact on the nation’s largest law firms. The revenues of the top firms, even after adjusting for inflation, roughly tripled between 1992 and 2006. The number of lawyers they employ, starting salaries for associates, and average take-home pay for partners have all continued to rise. Given an overall pattern of contraction, the continued growth of the big firms means that the pain felt elsewhere in the law business is all the more severe. For example, the average income of a solo practitioner in the United States in 2004 was less than $46,000—about a 30 percent decline, in real dollars, compared to the previous generation.
Normally, if an industry hits hard times, the schools that supply those industries are among the first to know because entry-level positions dry up and school enrollments drop precipitously. But law schools are enjoying enormous prosperity, with new schools opening and tuition rising rapidly. How can this be?
In large part, it is due to the unusual up-or-out structure of law firms. During hard times in most industries, employers tend to lay off newer employees and avoid hiring new workers. But the long-standing tradition of law firms is to fire nearly all senior associates who fail to win promotion to partnership. The result is that the demand for new law graduates is in many ways greater than the demand for lawyers who have been out of school for ten years. Even so, a large number of new lawyers are ending up in comparatively low-paying jobs.
Prospective law students, on the threshold of spending six figures on a legal education, need much better information about their future prospects in the law. So do young associates in firms. Law schools, the legal media, and the American Bar Association all have an important part to play in creating a better tracking system for the economic fortunes of our industry.
Look for an analysis of rising student loan debt v. hiring salary trends in next month’s issue of TYL.