In early 2022, major law firms increased the salary scale for their associate lawyers, giving them reason to consider a second round of aggressive rate increases this year. Currently, given the current lack of legal talent, wage wars are being waged to attract new qualified lawyers. The chart below compares the CPI-U to the consumer prices of three sectors prone to costly diseases: medical care, tuition and legal services. However, DIY companies are not a complete substitute for all legal needs. We know this to be true because so many DIY companies build networks of approved lawyers who can handle the large volume of legal work that can`t be done with a simple form. The following chart shows relevant CPI data for legal services. Since Post 001 of Legal Evolution, I have been dealing with the topic of “delayed legal productivity”. The above analysis shows that if legal services cannot be delivered more efficiently, ordinary citizens will forego legal services. This is not a prediction; That is an explanation of what is happening today. State courts are inundated with unrepresented litigants. At the same time, lawyers struggle to find clients who can support their practice. Many businesses, especially those that cannot afford salaries of $215,000 per year, will struggle to meet the current demand for legal services. But even large law firms, with their high salaries, are struggling to keep up with demand.
Many lawyers in large law firms are overworked, and firms cannot find enough qualified talent to meet their growing demand. The sharp decline in the relative importance of legal services indicates price elasticity – when price increases, consumer demand decreases. In contrast, the relative importance of medical care and tuition suggests price inelasticity – when the price rises, consumers find a way to pay more. Note two vertical axes when interpreting this chart. The green axis (left side) represents the CPI-U with the base year 1986 (index = 100). Over the past 30 years, the green and grey bars show that the cost of legal services has grown almost twice as fast as the entire CPI-U basket (334.5 versus 218.5). Countries and businesses around the world are grappling with inflation, which is rising faster than at any time in four decades. In the United States, inflation reached 8.5% in March, exacerbated by soaring food and energy costs around the world. U.S. industries are struggling to adjust prices and wages to keep pace with inflation.
No one is immune to its effects, and the legal industry is no exception. Last year, law firms increased their billing rates quite aggressively by 3.9 percent, while the consumer price index climbed to 7 percent. Meanwhile, Am Law 100 law firms have increased their rates by 5.6%. U.S. law firms also recorded their highest recovery rates since the Great Recession of 2008. One factor that may be partly responsible for PeopleLaw`s declining legal spending is the rise of the DIY (do-it-yourself) movement. Forms-based online products can be an attractive substitute for an office visit to a local small business owner. For a summary of these offers, see We Rock Your Web Review of Best Online Legal Services. It should be noted that many of these offers have an A+ rating from the Better Business Bureau). The costs of legal services to consumers are roughly equivalent to those of medical care, but significantly lower than tuition fees.
As shown in the table below, medical care and tuition fees in the CPI basket of goods and services are gaining in relative importance in terms of the share of the portfolio. The top 50 law firms have seen an increase in demand for legal services of more than 8%. Keep in mind that many of these firms` employees were already working long hours a week before the extra demand set in, so law firms didn`t have much left to do in-house. When the law firm`s management tried to correct the situation, they faced an uncomfortable hiring shortfall. The problem is not necessarily the escalating cost of a lawyer`s time ($260/hour in the latest CLIO survey, see Post 037), but our inability to update our institutions so that ordinary citizens can solve their legal problems in a practical and cost-effective way. In other words, it`s time to reshape some of our most sacred institutions. This is the challenge for the next generation of lawyers, judges and legal advisors. Finally, it should be noted that CPI data on legal services are limited to consumer spending. This is the PeopleLaw sector, which other data sources show is declining. See, for example, Post 037 (between 2007 and 2012, individual consumer spending on legal services increased from $65.5 billion to $58.8 billion). In the graph above, none (or very little) of the data reflects the spending of enterprise customers. The need for new legal staff is not just to win more projects, although this is a major factor in salary increases.
The fluctuation has also become costly. Large law firms have not kept their legal talent at an ideal pace. More than 40% of employees who left a company within the first six years of their legal career after graduation. Staff turnover at these rates costs on average between $200,000 and $500,000 per lawyer who leaves the firm. To put this in perspective, out of 20 lawyers hired in this quota, 15 are expected to leave in the first six years. In addition, hiring more employees to share the workload unduly relieves existing employees, reducing the likelihood that they will leave the company. The orange axis (right) measures the “relative importance” of legal services in the CPI basket of goods. The orange trend line shows this statistic over time. When the relative prices of goods and services change, consumers essentially adjust the way they allocate their money. BLS tracks these changes through the Consumer Spending Survey. Through detailed interviews and spending diaries conducted twice a year by a representative sample of urban households (89% of the U.S. population is considered urban), the BLS measures recent consumer behavior and weights the composition of the CPI-U basket.
In the chart above, you can see a sudden decline in the relative importance of legal services in 1997 (from 0.480% to 0.329% of consumer spending). This decrease is attributable to the rebalancing of the CPI basket by BLS for the first time in several years. However, since the mid-2000s, the BLS has rebalanced the CPI based on two-year moving averages. Therefore, materiality data for 2015 and 2016 are calculated based on spending patterns in 2013 and 2014. See Relative importance of components in consumer price indexes, December 2016. When 2017 data are released, they will likely be based on 2015/2016 weights. In the economic literature, the industries most associated with cost diseases are medical care and higher education. But, as Baumol points out, other “personal services” sectors are also highly susceptible to costly diseases. Examples include legal services, K-12 education, local police and fire departments (essentially most of the government), and many others. Cost sickness is a serious political problem because (a) goods and services such as medical care and higher education are seen as integral to our quality of life, and (b) when their costs rise much faster than the CPI-U (i.e. the “cost of living”), it generates a lot of political complaints. A second possible explanation for the decline in the relative importance of legal services is the diminishing value of state courts in dispute resolution.
This trend line would occur when the cost of a trial, including the need to hire a lawyer, becomes too high relative to the underlying problem or litigation. Increasing employee salaries will increase the operating costs of law firms. However, these increased costs pale in comparison to the money law firms would leave on the table if they could not meet the increased demand for legal services. In 2021, demand for legal services increased by 6.6%, while lawyers` fees increased by 6.5%. A successful lawsuit could occur if an employee can prove discrimination. To succeed in a discrimination claim, the employee would have to prove that there was wage or wage discrimination if employees who performed similar work did not receive similar compensation. Pay discrimination can also occur when the pay gap based on protected categories such as gender or race is illegal. It would be illegal for the employer to discriminate on the basis of the employee`s membership in a protected class. Arguably, law firms do not directly increase wages to correlate with the increased inflation of recent years. However, you can also argue that law firms indirectly raise salaries to correlate with inflation. Whether you look at the increase as a direct or indirect response to inflation, employee salaries have risen significantly in large law firms. This has led to wage wars in the legal field, as law firms compete to woo the most promising new employees.