Remedial Econ 101 For Dummies, Special Legal Academic Edition

Updated below

You may remember University of Chicago law professor Todd Henderson from such classic essays as “Why it’s really hard for an upper middle class family to scrape by on $400,000 per year in Hyde Park [Spoiler: Thanks Obama!].”

Now Henderson is explaining why lawyer salaries are skyrocketing:

In early June, the prestigious Manhattan law firm, Cravath, Swaine & Moore, announced it was raising the average salary for newly minted law graduates by nearly 13% to $180,000 per year. As expected, many of its competitors have followed suit, with some, such as Washington, D.C.-based Kellogg Huber, offering as much as $225,000. That 25-year-old lawyers with no experience can immediately be in the top 5% of U.S. earners (and within ten years in the top 1%) has generated some outrage, as well as claims that such salaries are needed to help overcome the high cost of law school.

But don’t blame these lawyers or the law schools. Lawyer salaries are driven by supply and demand, just like everything else. According to data from CEB, the average hourly rate charged by major law firm partners nearly doubled since 2000, while average hourly wages for both blue-collar and white-collar workers have increased less than 20%. Lawyer pay has also outpaced economic growth, which has averaged less than 1% per year in real terms over this period.

So what’s wrong? On the supply side, the American Bar Association operates a state-approved cartel, which uses a licensing regime to artificially limit the supply of legal services. In a recent white paper, the White House came out against occupational licensing in general, and breaking the ABA cartel would be a good first step in addressing the staggering growth in lawyer pay.

This is followed by a bunch of bog-standard glibertarian musings about how, in addition to the ABA cartel propping up lawyer salaries, Dodd-Frank etc. is driving up the cost of doing business, “perhaps” unnecessarily. How seriously should this sort of critique be taken?

It amazes me that at this late date people like Henderson (and there are still a lot of legal academics like him) can opine so confidently on things that they know nothing about. His views do tell us something about why the cost of legal education is so out of control, however.

I’m not trying to be rude here, but citing the growth in starting salaries at Cravath and the average hourly rate charged by major law firm partners for the proposition that ABA-created barriers to entry are propping up lawyer salaries is just astoundingly ignorant. It’s the equivalent of citing the growth in starting salaries for tenure track professors at Princeton and compensation packages of university presidents for the proposition that requiring university faculty to have doctorates is propping up academic salaries.

Henderson is using 2000 as his baseline, so let’s take a quick look at the numbers:

Median wage for all workers, 2000 (2014$): $28,811

Median wage for all workers, 2014: $28,851

So median wages for American workers have been completely flat over the past 15 years, while those of lawyers have seen staggering growth, because of a cartel that makes Ayn Rand cry. Not quite:

Median wage for lawyers, 2000 (2015$): $121,509

Median wage for lawyers, 2015: $115,820

Note that these are the numbers for wage-earning lawyers. For the majority of self-employed lawyers, earnings have declined more: the mean wage — the median is certainly a lot lower — for solo practitioners (half of all lawyers in private practice are solos) fell from $71,000 to $49,000 between 1989 and 2012, in constant dollars.

And note further that these two groups together don’t represent the earnings of law school graduates, 40% of which never have any sort of career practicing law.

Henderson’s perspective comes from assuming that the short-term economic prospects of the graduates of elite law schools provide a good guide to the state of lawyer compensation, which in turn provides evidence for the effects of regulatory licensing regimes on salaries. It’s nonsense piled on nonsense in other words.

It does help explain why law schools keep jacking up tuition three times faster than the rate of inflation year after year, however. I mean why not, if everybody is going to be a partner at Cravath?

Updated: Prof. Henderson has tweeted:

Sad response to @Forbes piece: ad hominem attack; arguing against position I didnt take http://goo.gl/0ES4ny U can do better @PaulFCampos
8:13 AM – 15 Jul 2016

The position in his piece is that over the past 15 years salaries for lawyers have gone up far faster than those of American workers in general, because of the supposed cartel power of the ABA (and too many regulations).

The problem with this argument is that lawyer salaries over that time frame have declined in constant dollars, and also relative to those of American workers in general. I’m not sure how pointing that out is an ad hominem attack, unless reminding people about his absurd whinging about his own salary counts.