The Protectionism Premium

August 18th, 2013 / By Deborah J. Merritt

Brian Sheppard of Seton Hall Law School has raised an interesting point about any financial premium associated with the JD: How much of that premium rests on the legal profession’s restrictions to entry? At the end of his post, Sheppard suggests that an “empirical study of the effects of various protectionist measures would be a worthwhile” endeavor.

I know about one such analysis, conducted by Mario Pagliero. Pagliero, an economics professor at the University of Turin, explored the relationship between bar exam difficulty and entry-level salaries for U.S. lawyers. Pagliero’s study relies on the circumstance that most of our states administer a common set of bar questions (the Multistate Bar Exam or MBE), while establishing very different passing scores. States have also changed their passing scores over the last few decades, offering a robust dataset of passing scores that vary by state and time.

Pagliero compares these passing scores with entry-level salaries reported by NALP for corresponding states and times. In this way, he explores whether exam difficulty (as measured by passing score) bears any relationship to entry-level salary.

In an initial paper, Pagliero reports a clear relationship between the two: more difficult bar exams correlate with higher entry-level salaries. He also finds that lower pass-rates correspond with higher salaries, suggesting that the first correlation relates to supply rather than quality. More difficult bar exams, in other words, reduce the supply of lawyers. Reduced supply, in turn, raises entry-level salaries. By Pagliero’s calculation, a 1% increase in bar exam difficulty corresponds with a 1.7% increase in starting salaries.

In a second paper, Pagliero uses the same data to examine a frequently debated policy question: Do licensing standards help consumers by reducing information asymmetries (in other words, by providing information about quality that consumers cannot readily obtain on their own)? Or do the standards primarily serve the profession, by restricting entry and raising salaries? Based on the data and his modeling, Pagliero concludes that, for the U.S. legal profession, “licensing, as implemented, increases salaries and decreases the availability of lawyers, thus significantly reducing consumer welfare.” (p. 481)

This isn’t terribly surprising. The legal profession enjoys significant barriers to entry: applicants must master (and pay for) four years of college, three years of law school, and the bar exam. Increasingly, they must also devote time to low-paid or volunteer apprenticeships. These substantial barriers reduce competition, allowing lawyers to charge a premium for their services.

How can this premium persist in the face of under- and unemployed lawyers? It is difficult for many of those lawyers to compete against established firms. Ethics rules prohibit lawyers from using outside investments to build a practice; lawyers may take loans, but may not share profits with nonlawyers. New lawyers also lack access to adequate supervision unless they obtain jobs with existing firms. Law graduates who fail to obtain jobs at prevailing wages may seek work in other fields rather than attempting to undercut fees.

If at least some lawyer income stems from protectionism, that raises at least two important questions. First, is protectionism good policy? Pagliero’s model suggests that US courts protect lawyers, rather than the public, by limiting access to the profession. Based on these results, other authors have called for deregulation of the profession. As individuals struggle to obtain affordable legal services, and courts flounder in a growing sea of pro se litigants, calls to deregulate the profession will continue.

Second, even without formal deregulation, the work reserved exclusively for licensed lawyers is shrinking. Companies like Legalzoom and RocketLawyer, which provide low-cost legal documents to individuals and small businesses, are flourishing. Software like WillMaker is even cheaper. My husband and I produced a full set of wills, powers of attorney, and living wills for less than $25.

These services cannibalize the work available to lawyers serving individuals and small businesses. Corporate firms, meanwhile, are losing business to in-house compliance officers, HR officials, and others who administer complex regulations for their companies. Within BigLaw, US-licensed lawyers have lost jobs to software and overseas attorneys.

The biggest threat to lawyers’ historic livelihood comes, not from technology or globalization alone, but from the way in which those forces encroach upon work that once belonged exclusively to lawyers. Lawyers, like other workers, are seeing some of their jobs lost to computers or overseas workers. For us, however, the loss may be greater than for those in unregulated fields. To the extent our incomes depended partly on a protectionism premium, we may lose a significant part of that premium as consumers find ways to address legal needs without direct representation by lawyers.

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