Sunday, November 1, 2009

Did Starting Lawyer Salaries Really Increase From 2000-2008?

In the year 2000, three trends converged to boost starting salaries at large firms: 1) the economy was booming with the "Internet Revolution" and it seemed like every startup that could get funded was turning ordinary people into millionaires, 2) due to the ability of the internet to quickly and anonymously propagate information, there was an increased  level of salary clarity and openness, and 3) due to the increase in work from startups as compared to a relatively static supply of new lawyers, and the presence of the internet as a new information channel, firms began to publically advertise their starting salaries, and increases in their starting salaries, in order to attract needed new lawyers.

This led to a substantial increase in starting pay for top-paid lawyers (from about \$100K to about \$125K in 2000) and a great increase in uniformity of pay over different geographic areas.  (Please note that although we use the top-paid lawyer data, the salaries reflected here for lawyers are not representative of what an average student may earn after law school.  For further insight into what students actually earn after law school, please look here, here, here, and here.)

In the later parts of the decade, salaries rose from \$125K to \$135K to \$150K before eventually topping out at \$160K/year.  Thus, most people (including prospective law students) view this as a decade where starting salary for lawyers drastically increased.  However, something unexpected happens when we actually look at the numbers in  real, spendable dollars.
The first thing that we have to realize is that there are several different ways of comparing the value of a dollar over time.  Here is a calculator that includes six ways of comparing the value of a dollar in one year (say 2000) to the value of a dollar in another year (say 2008).

The six ways are: CPI (Consumer Price Index), GDP (Gross Domestic Product) Deflator, Consumer Bundle, Unskilled wage, Nominal GDP per capita, and relative share of GDP.  Each is more or less useful depending on the desired comparison.

CPI is the economic measure of "inflation" that most people are familiar with.  However, CPI only compares the cost of products that an average household buys.  That's a great comparison if you are comparing, for example, the cost of eggs in 1959 to the cost today.  However, it is not that great a comparison if you are comparing wages or housing prices.  The GDP deflator suffers from similar limitations, although to a lesser extent.  However, the Consumer Bundle corrects for most of these defects.

On the other hand, the GDP is a measure of the total value of goods and services produced by the US in any one year.  Thus, if you are wondering how much of the US's economy was represented by the construction of the Hoover Dam, for example, then comparing the GDP at that time to now would be useful. Consequently, this number might be less useful in a direct salary comparison.

However, because we are looking to make comparisons of salary, the best numbers to look at for our purposes are probably the Unskilled Wage Rate and the Consumer Bundle.  The unskilled wage rate charts the change relative to what unskilled workers were earning while the Consumer Bundle charts the change relative to what the average household was spending.  Another tactic that we can take is to just average the 6 values.

Let's take a look at what \$125,000 in 2000 represents in year 2008 dollars (most recent year):
In 2008, \$125,000.00 from 2000 is worth:

 \$156,288.47 using the Consumer Price Index \$152,970.49 using the GDP deflator \$167,564.73 using the value of consumer bundle \$157,295.73 using the unskilled wage \$168,222.99 using the nominal GDP per capita \$181,397.28 using the relative share of GDP

Further, the average of these 6 values is \$163,956.62

Thus, comparing the salaries from 2000 and 2008, new lawyers made MORE in 2000 using the Consumer Bundle (167K vs. 160K), and more using the average of the six indicators (164K vs. 160K.)  Further, a comparison using the Unskilled Wage indicates that salaries have been essentially flat since 2000 (157K vs. 160K).

This shows us that the often-repeated belief that starting salaries went up drastically from 2000-2008 is frankly just plain wrong.  In reality, in real dollar terms salaries were either flat or declined slightly.  However, over the same time period, the cost for law school drastically increased, and continues to increase rapidly today.