Friday, September 3, 2010

What Supply and Demand Means for Law Students - Part 2

In this part, we continue our investigation of supply and demand in the legal profession and its impact on the hiring odds for law students  - Part 1 can be found here. In this part, I will detail some of my personal observations from over a decade of recruiting law students.

(Continuing from Part 1)

Fourth, I have been involved in recruiting for over a decade.  I have personally witnessed supply and demand in action.  For example, during boom times in the legal profession, the number of legal jobs goes up and law firms lower their qualifications in order to fill the positions.  This is especially true when there has been something to lower the number of students applying to law school.

For example, in about 2003 the minimum qualifications were as low as I have ever seen them.  At that time the supply and demand equation was very much in favor of the law student.  Can you think why that would be?  There were two forces that were at play.  First, on the supply-of-new-lawyers side, you have to recognize that going to law school is a decision that impacts the supply of lawyers, but it has a 4-year lag time.  That is, starting in about 1998, the brightest students that were looking to hit it big and make a lot of money did not go into law - they went into Internet startups.  They were still doing do until about 2001 when the startup funding died.  Just think about it - if you are young and want to make a good dollar, why would you work like a dog in a law firm when you could just join a startup and become a millionaire?  Further, after about 4 years (1998-2001) of students behaving this way, the applicant pool was running mighty thin in areas such as corporate, tax, and intellectual property.

On the firms-have-work-and-need-people side, around 2003 was the time when you really saw a pretty big jump in corporate work.  For example, there was a big increase securitization work for the new home loans and derivatives on them.  That all ended in tears in 2008, but it was an economic force that in 2003 distorted the marketplace in favor of law students.  Additionally, in 2003, although the stock market had crashed (and crashed worse than it did in this most recent recession) the fundamentals of he underlying economy still seemed to be fairly sound.  Customers of legal services were not as paranoid about hoarding cash.  There was a sense of "see, I told you that was wild speculation that would not work out, now let's get back to work".  If anything, that stock market crash urged companies to turn their money-making efforts to expanding their own lines of business rather than just passively investing - and when companies expand, they need lawyers to do a lot of legal work as they acquire new real estate, build buildings, hire people, develop and market products, etc.  Conversely, in this most recent economic downturn, companies are more interested in hoarding cash than investing in new operations - so that the legal work has actually decreased significantly.

What does that mean in real ability-to-get-hired terms?  Well, there is no solid survey data and individual situations may vary, but here is what I find to be pretty universal when I discuss that time with my colleagues.  Just to use average GPA as a barometer of how difficult it would be to get hired, I think that you are seeing the average large law firm's GPA for new hires to be about 3.3 pre-1998.  By about 2003, that had declined to about 3.0. 

Amazing, eh?  Often, the first question that I get from law students when I tell them this really shows me how very, very little they understand about supply and demand.  The first question is usually "Wow, how could law firms lower their standards like that."   Ugg.  If you are reading this and you have that thought, then I urge - URGE - you to get a better understanding of supply and demand before you blow $200,000 on legal education.  That you would ask this question indicates that you have a fundamental misunderstanding about how the system works.  Going back to my first point above, most of the students that are asking that question are unconsciously applying the model that they know (of educational institutions) to the practice of law.  In their mind, you can tell that "getting in to a law firm" is like "getting into a law school" in that the law firm just "sets standards" like a law school does.  Wrong.

The answer is that law firms don't actually have the control that the law students assume that they do - the law firms are at the mercy of supply and demand (just like law students are at the mercy of supply and demand right now).  Law firms NEEDED to hire people at that time - it's not a situation where they could just hold out and arbitrarily set their standards and deal with fewer or no recruits.  Inputs MUST come into the system - as required to service clients.

Further, take a look at the things that law firms did once they realized that they were under the boot heel of supply and demand - they first raised salaries, from $99K in 1998 to $125K, to $135K and up. You will also notice that salaries pretty much continued to rise until about 2005 - which represents the 4-year lag time that arises when people start going to law school again in 2001.  However, raising the salaries didn't make scads of well-qualified law students fall out of the woodwork - how could it?  All the other law firms were raising their salaries, too.  The entire industry was at the mercy of supply and demand.  You had law firms trying all kinds of crazy initiatives to try and attract people - even going so far as to try (honestly try in some cases) to provide their associates with a work-life balance that would not make most people weep.  However, it didn't really matter what they tried, the market was fairly fixed and their efforts produced minimal results.

Continue this discussion at Part 3 here.

1 comment:

  1. Interesting thing about the firm's hiring standards falling down to a 3.0 when hiring demand was higher.

    I am curious about one thing:

    sometimes, things seem to go in cycles. So, prior to having to drop your standards to a 3.0, your standards were a 3.3. Now, this is because supply of law grads was higher than demand. When the demand picks up and the firm feels it has to lower standards, does it ever consider some of the people that it passed up in the previous couple of years?

    That is to say, some people from the previous class, or two years ago may have had averages of 3.2, and just barely missed the 3.3 mark previously. But now that demand picks up and the firm even considers lowering to a 3.0 for the present classes, would the firm (or, in your opinion, should the firm) consider a 3.2 from a previous class?

    I guess what I'm trying to get at is this: is there really a "lost generation" effect where the timing just kills people? Like, it's better to have graduated with a 3.0 in a humming economy than a 3.2 in a sour economy?

    There is a hypothesis floating out there that demand will pick up in the coming years for attorneys because of various new stringent regulations imposed by government over financial sector, healthcare sector , energy/environmental sector. Some people argue that kids going into law schools now will be fine. Others argue that kids shouldn't go into law school now because there is still such a backlog. Then the first group counters that the backlog doesn't matter. There can be 10 million attorneys backlogged, and it still won't matter because they are the lost generation and they will be skipped over and fresh grads will be hired instead.

    I can see both situations as plausible. I wonder which one you think is more plausible. In other words, say attorney demand picks up in the year 2013. Would the law firms drop their recruiting standards to 3.0s of the graduating class, or would they be willing to look at people who graduated in 2011 with 3.5s but just couldn't get hired because of the bad economy?