Starting Salaries

Returning to the topic of law schools and the future of the legal profession, our friend and colleague, Larry Solan has posted an interesting proposal on the Huffington Post.  Law firms should cut their entry level salaries.  I think he's right.  The reasons, however, are much simpler than he suggests, and relate to the dynamics of competition.   So I hope you actual antitrust types out there will weigh in.  My point, in a nutshell, is that entry level law firm salaries are upward sticky, and that this has led to a number of unhappy pathologies, but most importantly, an exaggerated response on the demand side.

Solan argues that paying first year associates less would allow firms to train associates who are less profitable during their early years of practice.  I think this misses the point.  Firms aren't interested in training lawyers. They are not ever going to get fully minted lawyers from law schools either (especially if we eliminate the third year).  The real problem the firms face is that they have been caught in an environment where they can't adjust starting salaries down.

Starting salaries are a perceived signal about the quality of the firm, both to potential hires and to clients.  A firm that doesn't pay "street" is not viewed as a top firm.  This locks everybody into the same cost structure and drives a fair number of unattractive aspects of legal practice.  First, starting salaries drive minimum billables.  Second, high starting salaries make each hire more expensive.  Third, high salaries make it impossible to retain even excellent associates during slack periods.  The key point here is that the legal profession would be a much happier place if a firm could make money on an associate billing 1200 hours, rather than requiring 1800-2000 hours.  Even in New York, an associate can pay back law school debt at $90-100K/year.  The apartment might not be as nice, but the associate might actually get to sleep there.  Slack time could be used doing pro-bono work, participating in professional associations, building a network, enriching the profession, or drinking beer.

The problem is the negative signal sent by cutting entry level salaries.  Legal services are, in many respects a Giffen good.  Price is a proxy for quality.  Big Law is trapped in a reverse lemons equilibrium.  There's no way to compete by seeking to provide high quality lower cost legal services, since there's no credible way to signal quality other than perceived ability to draw high quality talent . . .

The question is whether the current downturn can break the cycle.

Deborah Merritt has written a snarky response to Solan.  She points out that large firms have made a move to cut salaries.  They've done it by creating lower paying contract positions within the firm.  These lawyers are handed the lower level tasks and have limited or no prospects for advancement within the firm.

I think my answer is, "So what?"  And, maybe even,"Wonderful!"  This creates an opportunity for middle tier firms to compete for students in the middle.  For example, imagine that Cravath is paying discovery attorneys $75K with no prospect of advancement, but paying partner track associates $150K.  That leaves a lot of room for a high quality medium sized firm to offer $90K and a career, rather than having to match Cravath.

The point is that in a labor market with a lot of slack capacity there ought to be downward pressure on salary.  For idiosyncratic reasons, law firm entry level salaries are upward sticky so all of the adjustment has been on the demand side.  The emergence of transparent alternate pricing structures that reduce the stickiness may be a good thing.