Category Archives: Law School

You Can Drown In a River That Is An Average of Six Inches Deep (Part 1)

Some Thoughts on ‘The Economic Value of a Law Degree’. Having read a great deal of the commentary on Michael Simkovic and Frank McIntyre’s paper The Economic Value of a Law Degree, as well as the paper itself, I can’t resist making some more comments of my own.

It seems to me that a fair amount of the controversy about this paper is that it does one thing (report on the recent history and distribution of the present discounted value of the earning premium from a law degree as opposed to no law degree), then suggests how its results can or should be used to do a different thing (decide if law school is a good financial bet today). It’s easy to misunderstand the relation between the two things. Some critics misunderstood the relationship between the two things; some others didn’t, but think that the authors of the original paper are (negligently or strategically) inviting prospective law students to misunderstand that relationship.1

In part 2 of this analysis I will suggest that a significant part of the dispute here also can be traced to a different understanding of what real rate of interest ought to apply to a prospective JD’s calculations. Simkovic and McIntyre use a 3% rate, which may in fact be appropriate for the average student. But you can drown in a river that is an average of six inches deep. The more debt students carry, the higher the interest rate they tend to have to pay. Thus for students with a lot of college debt who also borrow heavily for law school, the real rate is 4% or even more. (See the very last table in the paper, Table, Appendix Table A-2.) For a significant minority of these high-debt students — perhaps almost a quarter of the students carrying $200,000 or more debt upon law school graduation — a JD may not in fact be a good investment.

The other big source of controversy has to do with radically different visions of the likely future. Those who believe that the law is undergoing a structural transformation (e.g. outsourcing, mechanization, permanent change in customer demand, or inelasticity of customer demand, especially at the high end) think that any backward-looking study is a poor guide to the future. The authors’ response is that any structural transformation in the provision of legal services is likely to be mirrored by similar changes in many other careers open to BA-holders contemplating a JD. They argue that their study, which reports the income premium over a BA will likely hold true, or mostly true, in a future in which the economic value of a BA will also be devalued. The two sides simply disagree as to whether, as compared to previous legal recessions, this legal recession is (a) worse relative to the overall recession; and (b) different in nature.

I’m going to discuss each of these issues, and also say a few words about the policy implications of (my take on) this study. But before I do, please allow me a lengthy aside to raise a logically prior question: To what extent are Alice and Bob — tomorrow’s potential future 1Ls — likely to be competent to make good forecasts about where they likely will fall on the income distribution?

A. Law School Applications and the Dunning-Kruger Effect

I think that an intuition that Alice and Bob have a tendency to be over-optimistic drives a good chunk of the rage at ‘The Economic Value of a Law Degree’. There may be something to this fear, especially in a steep recession like this one. Right now the number of law school applicants has dropped some 13% over last year. I don’t have the latest data after what appears to have been a late surge in applicants, but back when the decline looked to be more than 20% what we were hearing was that the decline was especially steep at the high end of the credential distribution, that is among students with good grades and high LSATs.

If that’s true, it does raise the issue whether many Alices and Bobs might have a systematic vulnerability to the Dunning-Kruger effect.

The Dunning-Kruger effect is a cognitive bias in which “people reach erroneous conclusions and make unfortunate choices but their incompetence robs them of the metacognitive ability to realize it”. The unskilled therefore suffer from illusory superiority, rating their own ability as above average, much higher than in actuality; by contrast the highly skilled underrate their abilities, suffering from illusory inferiority. This leads to a perverse result where less competent people will rate their own ability higher than more competent people. It also explains why actual competence may weaken self-confidence because competent individuals falsely assume that others have an equivalent understanding. “Thus, the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others.”

If this is a real phenomenon, then in light of the current legal recession and the declining over-all prospects for law graduates we should (at least before the lessons of ‘The Economic Value of a Law Degree’ get internalized) expect more of the best students to stop going to law school, out of an unjustified fear that they will not be the best, and won’t get the best-paid jobs. Meanwhile, given that there are still some good jobs at the top, even if fewer than before, less competent students will — incorrectly — believe they are the ones who will get the best grades and get the best jobs, and will continue to apply in large numbers. We might thus see a decline in the credentials of the national applicant pool as a whole, and especially in the applicant pool of non-elite law schools.

But wait, it gets worse: if the Dunning-Kruger effect is large in absolute terms, then the absence of the best students will open up some space at the top, and students who formerly were in the middle of the pack will now find themselves at the top of the curve, validating their erroneous beliefs as to their abilities. In short, Dunning-Kruger effect + grading on a curve = wrong signals.

In this view of the world, one of the most important real-world effects of ‘The Economic Value of a Law Degree’ may be to draw back the more able students — the ones who take the trouble to collect data on their prospects — into the applicant pool. Perversely, however, this will make the next cohort’s Alices and Bobs worse off, as now they will be competing on graduation with a stronger talent pool, thus perhaps diminishing their place in the outcome distribution.

I mention this first, before getting to any advice to Alice and Bob about how to use the data in ‘The Economic Value of a Law Degree,’ because the more I think about it, the more I suspect that the effect on the composition of the applicant pool, even more than its size, may be the most lasting effect of this paper: if this data holds up, smart students who do their homework carefully and would be strong applicants to law school may be less likely to be frightened off without reason. Conversely, poor students, who don’t read carefully, may misunderstand the results of this study and the attendant publicity and suffer from unreasonably optimistic estimates of their prospects. Both critics and supporters of the paper might be right since they are looking at different pieces of the elephant.

I don’t know for sure if any of this is even vaguely correct, and there’s certainly nothing in the data I’ve seen that would tell me. But it does illustrate some ways in which it’s hard for even a careful, risk-averse person to guess their future income stream.

B. ‘This Time Is Different’ — Or Not

Recall that one of the big issues that divides Simkovic & McIntyre from their critics is to what extent the current legal recession is due to something special about a change in the demand for legal services — the claim that this time really is different. Simkovic & McIntyre say that the past ought to predict the future, that they don’t think anything terribly special is going on. I can’t claim special expertise on this debate. For what little it’s worth, I tend to think we’re all in the soup together, and that globalization, outsourcing, not to mention robotics and applications of big data will reduce the premiums for many professions, including both law and medicine, but I can’t point to anything that much stronger than a hunch based on current data and what I read about developments in technology. You might reasonably reply that it’s all very well for me to say that, but isn’t it darned convenient to my own economic interests, and a neat way to avoid the discomfort I’d have to take on if I thought law school really was a scam?

To those who say that the last couple of years have been particularly ugly for law graduates compared to past years, I can only say that my understanding is they were also pretty ugly for college graduates. According to 2012 BLS data,

About 1.5 million, or 53.6 percent, of bachelor’s degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years. In 2000, the share was at a low of 41 percent, before the dot-com bust erased job gains for college graduates in the telecommunications and IT fields.

Out of the 1.5 million who languished in the job market, about half were underemployed, an increase from the previous year.

The lawyer numbers are bad, but these are, if anything, worse. Things are really bad out there for a lot of people. (This is why macroeconomic policy is so important.) It may be that those of us involved in the production of new lawyers and the reproduction of hierarchy are, or tend to know more of, the ones with a new JD. As we will see, that doesn’t by any stretch mean that every law degree is a good investment. But it does mean that the problems of buyer’s justified remorse may not be due in the main to something about the changes in the nature of the demand for legal services.

Coming In Part 2: How Much Should a Prudent Student Be Willing to Pay for a JD?


  1. In his latest comment, Brian Tamanaha suggests a different divide: whether one focuses on the long term, in which maybe a JD isn’t a bad investment, or the short term, in which recent graduates facing huge debt repayment and lower salaries than they hoped for face a serious cash crunch. []
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Fur Flies in Debate over ‘The Economic Value of a Law Degree’

While I’ve been finishing some work and riding on airplanes the debate over Michael Simkovic and Frank McIntyre’s paper The Economic Value of a Law Degree has been raging in the blogosphere. There is an element by which the parties are talking past each other but I think there is light as well as heat.

Here are links to the counterpunching highlights, more or less in order:

[Update (7/25/13): Add Brian Tamanaha’s Straw Men (Part 2): Who's Cherry Picking? to the list.]

Below I want to correct an error in one of my earlier posts. In my next posting on this topic I plan to offer a few relatively timid thoughts describing what I’ve taken away from the debate so far.

Here’s the correction: In Simkovic and McIntyre Respond to Critics (Updated), I wrote, regarding people who don’t enjoy law school, that,

In some cases the cost of three years of hell may not justify a lifetime increase in net income of, say, $350K. After all, over a 40-year career, that’s an average of just $8,740/year…and indeed most of it comes in the out years, not early when you are struggling to repay debt.

This was a mistake because it confused present discounted dollars (the currency of the Simkovic & McIntyre paper) with nominal dollars. In nominal dollars the actual premiums predicted by their paper would be much higher, particularly in the later years since lawyers typically make more when they are senior and the out years are more heavily deflated in a NPV calculation.

On the other hand, I should also have emphasized that the study compares a JD to a no-JD, ie BA-only, world. It doesn’t compare a JD to an MBA or other advanced degree. Even taking all the study’s assumptions on board, the premium for alternate degrees might be higher than a JD, or in any case not as big as the JD/BA.

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Simkovic and McIntyre Respond to Critics (Updated)

Michael Simkovic and Frank McIntyre are blogging at Concurring Opinions, and responding to critics. See for example, Brian Tamanaha Says We Should Look at the Below Average Outcomes (And We Did). It includes a nice summary of key findings:

As we discuss in the article, for technical reasons related to regression of earnings to the median, our 75th and 25th percentile values are probably too extreme. The “75th percentile” value is likely closer to the 80th or 85th percentile for lifetime earnings, and the “25th percentile” is likely closer to the 20th or 15th percentile.

In other words, roughly the top 15 to 20 percent of law school graduates obtain a lifetime earnings premium worth more than $1.1 million as of the start of law school. Roughly the next 30 to 35 percent obtain an earnings premium between $1.1 million and $600,000. In the lower half of the distribution, roughly the first 30 to 35 percent obtain an earnings premium between $350,000 and $600,000. Roughly the bottom 15 to 20 percent obtain an earnings premium below $350,000. These numbers are pre-tax and pre-tuition.

Even toward the bottom of the distribution, even after taxes, and even after tuition, a law degree is a profitable investment. And that is before income based repayment, which can substantially reduce the risk at the bottom of the distribution.

Previously: Study Finds the Net Present Value of a Law Degree is Highly Positive.

I think the best critiques of the study I’ve heard so far are:

1. Maybe there really is a structural shift going on in the way legal services are delivered. If so, past cycles are a poor guide for the future. (To be fair, that’s a different paper; but it may not be a different historical moment.)

2. Because it uses general averages, the study may mislead people who invest large sums in law degrees from low-quality (or even low-prestige, which isn’t necessarily the same thing) institutions. Their outcomes seem to be worse than average. (Although the authors seem to think that even here, the NPV will tend to be positive. I’m a bit dubious especially at full freight.)

3. The study doesn’t discuss bar passage. Is it perhaps the case that there’s a large difference between those who pass and fail? And if so, shouldn’t the bar pass rate at the law school you plan to attend be something to pay close attention to?

4. The study doesn’t discuss the financial, much less hedonic, consequences of carrying heavy debt from college and law school. (Again, sort of a different paper.)

Thus, the study is a useful data point for law school applicants/entrants and a useful corrective to some recent sturm und drang. But it’s not by any means 100% of the story either.

[Update: I've thought of a fifth sort-of-critique --

5. The study treats the experience of law school as neutral, neither better nor worse than the three-year alternative job. I happened to have a really good time in law school, so for me it was a net benefit; other people report hating the experience and for them it is a net cost. In some cases the cost of three years of hell may not justify a lifetime increase in net income of, say, $350K. After all, over a 40-year career, that's an average of just $8,740/year...and indeed most of it comes in the out years, not early when you are struggling to repay debt.]

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Study Finds the Net Present Value of a Law Degree is Highly Positive

The hot legal paper of the moment is undoubtedly The Economic Value of a Law Dregree by Michael Simkovic and Frank McIntyre who are respectively a law professor and professor of finance.

Their data-driven conclusion (p. 49) flies directly in the face of recent conventional wisdom:

After controlling for observable differences, we find that a law degree is associated with approximately a 60 percent increase in expected median monthly earnings and a 50 percent increase in hourly wages, as well as reduced risk of unemployment or underemployment. We find earnings differences between men and women, and that these differences are due primarily to differences in hours worked. The law degree earnings premium is cyclical and recent years are within historic norms. Applying reasonable discount rates, we estimate the mean lifetime value of a law degree in 2012 dollars as of the start of law school to be approximately $1,000,000 before taxes, and $700,000 net of taxes. Median pre-tax lifetime values are approximately $600,000 (after taxes, $420,000). This suggests that, for most law school graduates, the value of a law degree typically exceeds its cost by a very large margin.

Some other key findings:

  • [A] law degree increases both work hours and wages per hour, and most of the increase in earnings is due to increased earnings per hour. (p. 15)
  • The mean annual earnings premium is approximately $53,300 …. starting salaries are not very good predictors of lifetime earnings. (16)
  • Law degree holders’ annual earnings grow faster and peak later than bachelor degree holders (20).
  • “Even at the 25th percentile, the earnings premium is large …. on a percentage basis, the earnings premium is similar for those at the median and 25th percentile, and considerably higher for those at the 75th percentile. In 2012 dollars, the annual earnings premium increases from $17,300 at the 25th percentile to $32,300 at the 50th percentile, to $62,200 at the 75th percentile.” (22-23)
  • “The data does not suggest that law graduates were unaffected by the recession. Rather, earnings dropped for both law graduates and college graduates after the late 2000s recession, and law graduates maintained their relative advantage. It is this relative advantage—not absolute outcomes— that measures the value of the law degree. Our data suggest that law degree holders are not immune to economic downturns, but they have continued to fare better in the recent downturn than bachelor’s degree holders without advanced degrees. Moreover, long-term historic data remains a reasonable and appropriate data source to forecast future earnings premiums.” (32)
  • “Rounding to the nearest $10,000, we find that the mean value of a law degree is $990,000, the median is $610,000, and the 25th and 75th percentiles are $350,000 and $1,100,000 respectively. The Internal Rate of Return at the median is 13 percent in real terms, or approximately 16 percent in nominal terms.” (41)
  • “[E]ven at the 25th percentile, a law degree exceeds typical net-tuition costs by hundreds of thousands of dollars. At the mean and 75th percentiles, the difference is close to one million dollars. We therefore reject the claim that law degrees are priced above their value. Indeed, the value compared to net-tuition prices suggests that legal education is a competitive market in which surplus redounds to the benefit of student-consumers.” (41)
  • There is a large gender difference at the high end: “Rounding to the nearest $10,000, the mean value of a law degree is $1,030,000 for men and $820,000 for women. The median values are $580,000 each for both men and women, although the premium is higher for women in earlier years and higher for men in later years. At the median, internal rates of return are 11.5 percent for men and 14.3 percent for women. Higher earnings for men at the high end of the distribution are likely due to longer hours and increased labor force participation.” (42)
  • “Even at the 25th percentile of women, our estimate of the lifetime earnings premium of a law degree, $350,000, exceeds the typical cost of a law degree by a wide margin. That is, in spite of lower average lifetime earnings premiums for women compared to men, a law degree remains a good investment for most women who obtain a law degree.” (42)
  • These are pre-tax dollars, but the after-tax story, at current tax rates, is similar: “the mean after tax value of a law degree is $720,000 for men and $570,000 for women. For low earners, such as those in the 25th percentile, values should be multiplied by 0.75. For very high earners, such as 75th percentile men, or for those anticipating higher tax rates in the future, values can be approximated with a 0.65 multiple.”
  • The paper also presents data suggesting that the current law school ‘crisis’ is similar to previous cyclical downturns; they argue that the decision as to the value of law school should be based on relative earnings and unemployment to those with just a BA — to the extent everyone is doing badly now, law school graduates may still be doing well in relative terms.
  • Key point: “Because we discount our estimated law degree value to the start of law school, interested parties can multiply annual net-tuition by three and compare the results to our estimates of after-tax value.” (43 n. 109)

I should note four assumptions in the calculations, set out at pages 39-40, that I think increase the claimed value of the law degree, although I don’t think any or all of them would change the bottom line enormously:

  1. The authors assume that students graduate at 25 (thus giving them more years to realize the increased earnings).
  2. They assume that law school costs $30,000 per year in tuition and expenses (which they say is consistent with ABA data on average net tuition after scholarships and grants in 2010-2011) — this allows them to say the opportunity cost per year is c. $55,000, which feels low to me although I admit I’m not clear on whether in light of #4 below this number includes living expenses; if it doesn’t it might be reasonable.
  3. They assume law students earn an average of $24,000 in summer and term-time work during the 3 years of law school, which may be high.
  4. They assume costs of living while in school are similar to costs of living while working full-time and that “any differences reflect consumption benefits, and therefore need not be accounted for separate from opportunity costs of lower in-school earnings.”

It seems like a careful job. I do want to stress that the numbers offered are present discounted value in current dollars and that they do NOT take account of the cost of tuition. Thus, to figure out how these numbers work for a prospective student, the student would need to compare the total of three years of law school tuition with a PDV of income estimate adjusted for these factors:

  1. Age at graduation (the higher it is, the lower the PDV of the increase in the projected lifetime income stream)
  2. Tuition (but not living expenses unless they are much higher than the alternative)
  3. Lost salary during law school, after taxes (?), if much in excess of $25,000 per year
  4. Gender, if you think existing patterns of work and/or discrimination will continue
  5. Where you think you might be in the income distribution

Thus, to take a near-worst-case scenario assume you are a woman planning to graduate at age 25, who believe sex discrimination will continue, or that you may choose to drop out of the workforce, or take reduced hours, for a chunk of your career. Assume further you are risk-averse, and thus want to find out if a degree is a good value even if you earnings are at the 25th percentile in the class. [Note that the study ranked earnings by percentile, it did NOT estimate earnings by class rank, although we know there is some imperfect correlation. Thus the 25th percentile here is an income outcome not an educational outcome.] The present discounted value of your expected earnings is $427,500 (which is less than a similarly distributionally challenged male, who would have a PDV of $540,000). If your law school tuition and expenses (other than room and board you would pay anyway) are less than this in 2010 dollars, odds are you are making a smart bet in terms of net lifetime earnings. So if tuition is $160,000 total, and before law school you make $65,000 per year, you compare ($160,000 + (65,000 – 25,000)*3*[1-tax rate]) to the PDV post-tax value of the degree, which is $427,500. Because, say, $280,000 is less than $427,500, the law degree has a real positive net present value — over your expected life time, even if not in your first year out of law school. And of course the numbers are substantially better with less restrictive assumptions.

Note, however,that the analysis assumes you graduate. And it doesn’t attempt to take much account of the practical effects of an increased debt service burden when combined with undergraduate debt (except to note the historically low rate of student loan default for law grads as a group). Nor does it consider the effect that debt may have on your career choices or happiness. It could be that having less debt young might allow you to buy a house younger and thus be happier while having less money over all. But economists are not concerned with that sort of issue; this is a strictly financial calculation. Even so, it’s interesting work — and encouraging stuff for those of us engaged in the production of law graduates.

[Note: Latter part of next-to-last paragraph edited and expanded for clarity.]

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Innovative Thinking Could Save Law Schools $$$

Although not directed primarily at law schools, the innovative suggestions in Forget MOOCs–Let’s Use MOOA could easily be used to save most US law schools a very large chunk of change. Perhaps this should be in our next strategic plan?

(Spotted via Naked Capitalism.)

Posted in Completely Different, Law School | 4 Comments

Yet Another Law School Ranking

Given the source — AbovetheLaw.com — I would have been prepared to dismiss it out of hand. But Brian Leiter, who is a very discerning consumer of rankings, says that that the “ATL Top 50” is “not nuts and contains some useful information”. Coming from him, that is fairly high praise.

U.Miami Law comes in at 49th on the list — considerably higher than our usual US News rank, and right near the middle of the range (41-55) I would put us at if I were Ratings Czar. And Yale is #1, so they got that right too.

Posted in Law School, U.Miami | 1 Comment

Research Assistant Wanted

Apologies, blog readers, but this announcement is for UM Law 1L & 2L students only:

I would like to hire a part-time summer research assistant. The hours are negotiable, but likely would be in the 15-20 hours per week range. It would be best if you could start very soon after exams finish. Current UM 1Ls and 2Ls are welcome to apply.

My research assistant will help me with my summer writing projects. The job requires someone who can write clearly, is well-organized, and who is really good at finding things in libraries and on the Internet. There may be some bluebooking involved too. (If you happen to have some web or programming skills (some or all of HTML, MySQL, Perl, Debian), that could be useful, but it is not in any way a requirement.)

The hourly pay of $ 13 is set by the university, and is not as high as you deserve, but the work is sometimes interesting.

If you are interested, please send me an e-mail with the words RESEARCH ASSISTANT (in all caps) followed by your name in the subject line. In the email tell me:

– how many hours you’d ideally like to work per week and what other jobs/courses you have planned for the summer (if any),
– when you are free to start, and whether you have vacation plans (no problem if you are planning to take a week or two off during the summer)
– your phone number and email address.
– whether it is OK for me to share your application with other interested faculty members who might also want a summer research assistant.
– whether, if things work out, you might be interested in continuing on at 10/hrs week during the next academic year.

Please attach the following to your email:

1. A copy of your resume (c.v.),

2. A short writing sample (non-legal is preferred — in any case, please do NOT send your LCOMM memo),

3. A transcript (need not be an official copy).

(You might also mention that you saw the ad here. Can’t hurt.)

Please note that this job is different from the Jotwell summer editor position.

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