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January 5, 2012 5:02 PM

New BEA Data Showing Legal Sector Grew 2.3 Percent in 2010 No Reason to Celebrate

Posted by Matt Leichter

On December 13, 2011, the U.S. Department of Commerce's Bureau of Economic Analysis (BEA) updated its "GDP-by-Industry" page.This means it published data on what happened to the legal sector of the U.S. economy which employs the vast majority of America's lawyers—in 2010. Despite being more than a full calendar year behind, this information is still useful for those interested in long-term trends in the industry, particularly because the BEA also changed its methodology and revised the last several years of industry output data.

Cutting to the chase, we find that in 2010, the legal sector grew 2.34 percent in real terms, amounting to $3.9 billion. To put this in context, that's the highest growth rate it has seen since 2004, and the first serious growth the legal sector has enjoyed since it started contracting after peaking in 2005.

For those who haven't read my earlier essay, "Media Outlets Claiming 'Law Is No Longer a Golden Ticket' Conceal Decades of a Profession in Decline," the legal sector has performed badly in the twenty-first century—so badly that it's smaller today than it was in 2000. Here's what it's looked like since 1977.

01 Real Legal Sector

Those who read the BEA's press release itself might be excited by this line in its press release:

"Recoveries in durable-goods manufacturing, wholesale trade, and professional, scientific, and technical services industries were the leading contributors to the turnaround in U.S. economic growth in 2010."

Private legal services fall into the "Professional, Scientific, and Technical Services" category, so did they contribute to the recovery?

I've made much of others making much of the legal sector's share of GDP. Despite the turnaround, the overall economy outdid the legal sector yet again in 2010, and now the sector's share-of-GDP is at yet another record low of 1.31 percent, down 0.01 percent in 2005 dollars as shown in the next chart. The following chart compares the relative growth rates of the legal sector against the overall economy after adjusting for price changes.

02 Real LS Share Real GDP

03 Rate of Change Real LS vs Real GDP

Similarly, compared to "Professional, Scientific, and Technical Services," the legal sector lagged yet again and fell to a new record low of 11.04 percent in 2005 dollars.

04 Real LS Share of Prof & Biz Svcs

As I said before, I discourage people from reading too much into the legal sector's share of GDP (or any other category). Just don't believe that legal services helped lead the recovery because the BEA says its parent category did. Caveat aside, I still think that at best legal services will never account for much more than 1.5 percent of the U.S. economy as calculated in 2005 dollars.

Unlike shares-of-GDP, I have made much of what I refer to as the "bottleneck argument." Law school administrators respond to claims of systemic law school overenrollment by pointing to the Great Recession as the sole cause of law graduates' underemployment, even though the legal sector started contracting in 2006. These administrators imply that the swelling pool of underemployed graduates will find fruitful employment as lawyers once the economy recovers, if they still wish it. With the new BEA update, we can project potential legal sector output based on the 1997–2005 growth rates. It looks like this:

05 Potential Real LS

From 2006 to 2010, the legal sector should have produced a cumulative $1.036 trillion, but instead only created $903 billion—a $133 billion deficit over those five years, or 12.8 percent of total potential output. In 2010, the legal sector operated about 21 percent below capacity. During the reference period, 1997–2005, the legal sector grew at an average annualized rate of 2.7 percent. True, we don't yet know what happened in 2011, but with painfully slow growth overall and the fade out of the 2009 stimulus, I don't think 2011 will look better than 2010. In short the U.S. legal sector is going nowhere. We'll see soon enough if I'm right.

Moreover, there are two pieces of evidence that pretty clearly suggest the new $3.9 billion did not go to fresh law school graduates, which would validate the bottleneck argument. The BEA updated its employment data as well, and the numbers of "full-time equivalent," and "full-time and part-time workers" in the legal sector both dropped.

06 BEA LS Employment Data

In 2010 there was a net loss of 6,000 full-time equivalent jobs in the legal sector. Aside from full-time, nonlawyer support personnel layoffs, that can't mean many stable long-term positions opened for neophyte lawyers, self-employed or otherwise. In fact, between 1999 and 2010 the industry has only seen a net growth of 93,000 full-time equivalent positions against 494,600 ABA law school grads.

Here is a projection of the potential full-time equivalent legal sector jobs versus the actual numbers.

07 Potential & Actual LS JobsThat's a 174,000 full-time equivalent jobs deficit in 2010 (13.9 percent). From 2006–2010 alone, there were 219,288 ABA grads. Obviously the deficit includes nonlawyers, and it's on top of the juris doctor surplus the Bureau of Labor Statistics has reported about since at least the 1990s. Also, don't forget the lawyer attrition rate must be fairly high, which is good for the short-term employment data but bad for long-term concerns about career satisfaction, debt repayment, and the stability of the profession.

Still it is a fairly large gap, and while I'm skeptical there could be that many lawyer jobs, who knows? Maybe the bottleneck really is that large. I admit I'm pretty much acclimated to a world with high unemployment and dim prospects for new lawyers, so maybe 100,000–150,000 law school graduates over those years could have found more meaningful work in the profession, at least for a few years. I just don't think that counterfactual is a plausible alternative outcome given structural factors affecting the legal profession, but let it not be said that I lack imagination.

Back to the topic of where the new $3.9 billion in legal sector spending went, here's the BEA's composition of the legal sector's "value added" after compensating for the legal sector deflator.

08 Components of LS Real Value Added 09 Components of LS Real Value Added

While employee compensation and taxes are intuitive, gross operating surplus means "everything else," which is unhelpful. The Expert Glossary defines it as, "consumption of fixed capital, net business current transfer payments, corporate profits, and proprietors' income." In other words, the gross operating surplus includes maintenance costs, firm gifts, payments for personal injuries caused, taxes to foreign governments, and of course, partners' compensation, which I'm guessing are the largest component of the surplus. This is where the 2.34 percent growth went. Not to law school graduates. The bottleneck is still growing.

What to take from this? This is why I prefer the BEA's broader data over NALP's on specific graduating classes. Legal sector employee compensation has dropped steadily since its peak in 2003, and the benefits of the 2010 recovery went exclusively to the gross operating surplus. Since the number of full-time equivalent workers dropped in 2010, the legal sector distributed the new $3.9 billion to existing workers within the industry, mainly law firm partners. Going forward, assuming that anyone who starts their own practices will not make more than if they had not gone to law school—which I think is a fair assumption—unless employee compensation and the number of full-time equivalent workers start making serious upturns, it's going to be very rough for new lawyers trying to find associate-level work in the private legal sector. With technology, outsourcing, and clients less willing to pay associates, I predict employee compensation will stagnate indefinitely at best and gross operating surplus (and taxes) will grow instead. Hopefully the BEA won't make us wait until next December to bear that out.

Matt Leichter is an attorney licensed in Wisconsin and New York, and he holds a masters in International Affairs from Marquette University. He operates The Law School Tuition Bubble, which archives, chronicles, and analyzes the deteriorating American legal education system. It is also a platform for higher education and student debt reform.

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