lawgraduates006The ABA just released 10-months out employment data for the class of 2016.  The percentages of grads employed in full-time/long term Bar Passage Required and JD Advantage jobs is up (72.5% compared to 70.1% in 2015).  However, the total number of these jobs is down (28,029 to 26,923).

Is this good news for law schools? Continue Reading Supply of Law Graduates Is Shrinking, But So Is Demand (006)

Between 1971 and 2010, the average entering 1L class at an ABA-accredited law school was 246 students with a very narrow band of fluctuation. The high-water mark was 262 in 2010. Every year since 2012 has set a new historical low. As the chart above shows, the average has tumbled by a staggering 31%.

When I made these calculations, the decades-long stability of entering 1L class sizes grabbed my attention. Economic downturns, shifts in the legal landscape, and even the fallout of ’08 didn’t initially deter enrollment. Yet, what was changing in the background throughout this period was the total number of ABA-accredited law schools. Here is the data in ten-year increments:

  • 147 in 1971
  • 172 in 1981 (+24)
  • 176 in 1991 (+4)
  • 184 in 2001 (+8)
  • 201 in 2011. (+17)

The peak for ABA-accredited law schools was 204 in 2014, though mergers and closures have reduced the number back to 201 in 2016.

Imagine if a hotel, airline, or restaurant experienced a 31% decline in the number of paid customers.  The price competition for marketshare would be disastrous, leading to industry consolidation that would improve pricing power.  Higher education is different, however, in a way that complicates the analysis. Specifically:

  • The biggest cost-driver in higher ed is labor. Because of the extensive protections on professor tenure, most of these labor costs are fixed rather than variable costs.
  • Universities have little experience with shutdowns or reductions in force; further, such actions would likely create severe cultural turmoil.
  • Unlike in private industry, there is no well-established playbook for divesting, acquiring, and merging academic units across universities.

How does the overcapacity resolve itself?

This is conjecture on my part, but based on the analysis above, I think we will see a few more law school closures, but not nearly as many as the grim economics might suggest.  Why? Some law schools have responded to the applicant downturn by creating new non-JD programs. Law bears on virtually all realms of human activity – bringing about the opportunity to create one-year Masters degrees, which appear to have significant demand, particularly in large urban centers.  Other schools are specializing in online education. To the extent such programs are successful, they will be copied by other law schools in different regions.

Will the overcapacity be resolved by a boom in demand for legal services?

This is unlikely.  The sharp decline in law school applicants was due to extensive media and blogosphere coverage of the entry-level meltdown.  This commenced in 2010.   Markets are driven by information.  Over the last few years, the public information on the legal job market became much better.

Also, there is a strong argument to be made that the downturn in the entry level jobs is due to structural factors.  For example, we know from the data presented in Post 003 that for 20 years corporations have been moving lower-level work in-house. In most cases, the workforce has been law firm associates willing to step off partnership track. Profitability has remained high at law firms because the more complex work can’t be cost-effectively in-sourced. During the 2000s, corporate clients began exerting their market power by refusing to pay for junior associates. Not all clients applied pressure, but enough to create uncertainty and turmoil within law partnerships. The solution was to hire a lot fewer associates – something they could do because the mix of work had become more specialized and could be staffed by a mix of staff attorneys, of counsel, and non-equity partners. Because so many firms converged on this same solution, the BigLaw entry level labor market was cut in half.

If corporations are reluctant to buy associate time bundled together with skilled senior partners, the boom in demand for legal services will have to come from a different source.  I think such a demand exists, though legal education will have to retool to tap into it.  That is a topic for another day.

What’s next?  See How Much are Corporations In-Sourcing Legal Services (003)