Topics:

• Ability sorting and selection
• Occupation and the versatile law degree
• Long term versus short term
• The broader labor market
• Present value and opportunity costs
• Acknowledgements

In The Economic Value of a Law Degree,
Frank McIntyre and I estimate the increase in annual and lifetime earnings that
is attributable to a law degree.  To do
so, we compare those with law degrees to similar individuals with less
education.

Because those who matriculate at law schools may be
different from the average bachelor’s degree holder, we compare law degree
holders to a group of similar
bachelor’s degree holders.  

There is a misperception—apparently started by Brian
Tamanaha (here and here) and repeated
by others—that we simply compare law degree holders to all bachelor’s degree holders, or that we compare the 25th percentile of law degree holders to the 25th percentile of all bachelor’s degree holders.  This is not true.

At a high level, what we essentially did was to create two
subgroups of bachelor’s degree holders—all bachelor’s degree holders, and a
subset of bachelor’s degree holders who look like the law degree holders with
respect to many observable characteristics that predict earnings—demographics,
academic achievement, parental socio-economic status, measures of motivation
and values.  It is this second group of
bachelor’s degree holders that we compare to the law degree holders.

To check for ability sorting and selection, we use
statistical techniques including:

• Ordinary Least Squares (OLS) regression (at the
  mean)
• Quantile Regression at the:
  • 25^th percentile
  • 50^th percentile
  • 75^th percentile 
• Propensity score matching (for our lifetime
  earnings premium estimates)
• Heckman Selection (in an appendix)

 

The observable characteristics (pretreatment covariates) that
we focus on as controls in the Survey of Income and Program Participation
include:

• Race
• Age
• Gender
• Number of years of high school coursework in
  • Math
  • Science
  • Foreign Language
  • English
• Type of High School
  • Private vs. Public
  • College preparatory classes in high school
• College major (divided into five categories
  based on the International
  Standard Classification of Education)

 

These controls bring down our earnings premium estimates by
around 10 percent at the mean and around 8 percent at the 25^th
percentile. 

 

In other words, the data and statistical techniques that we
use suggest that the kinds of people who go to law school would probably earn
about 10 percent more than the average bachelor’s degree holder even if they
hadn’t gone to law school.  But the law
school earnings premium is much greater than that, and the earnings premiums we
report are after controls for ability
sorting.

We do an additional check for ability sorting using another data set called the National Education Longitudinal Study (NELS).  NELS follows a cohort from 8th grade through their late 20s, and includes additional pretreatment control variables that are not available in SIPP.

Controls that are available in NELS include:

• college quality
• demographics
• standardized test scores
• college GPA and major
• motivation and interest in careers
• subjective expectations about future income
• Parent SES

The results of the analysis using NELS are very similar to
the results of the analysis in SIPP.  The
bachelor’s degree holders who go on to law school would probably earn about 10
percent more than the average bachelor’s degree holder, even if they had not
gone to law school.

Because this level of ability sorting was already taken into
account in our SIPP analysis, we do not believe that any further adjustment to
our SIPP results would be justified based on the analysis in NELS.  Because different measures of ability that
predict earnings are often correlated with each other, adding more and more
control variables that measure essentially the same thing often won’t
substantially change the estimate of the earnings premium.

Thus we found very little to suggest that law graduates’
above average undergraduate academic performance translates into higher earnings other
than what we had already accounted for. 
This may be surprising to people for two reasons.  First, law degree holder undergraduate
academic performance is better but not fantastically better than the typical BA.  Second, that above average performance does
not actually translate into much of a boost to earnings.   It
turns out higher undergraduate grades, for example, do not show a strong
correlation with later earnings.  We find
that this is especially true, by the way, in the majors preferred by law
students in the humanities and social sciences.

 

 

Eric Rasmusen has an interesting blog post qualitatively describing the "typical" law student.

There are several other issues related to selection on
unobservables and offsetting biases that are worth mentioning.

Annual vs.
Lifetime and regression to the median:

Annual earnings tend to be much more varied than longer-term lifetime earnings.  For one example, job losses or transitions can cause a sharp drop in one year, but tend to be resolved by the next year.  People going through such temporary rough spots show up low in the earnings distribution.  So the 25th percentile of one year earnings is much lower than the 25th percentile over average lifetime earnings.

Reporting
Bias:

When reporting
earnings, people tend to not report periods of unemployment and such.  The SIPP returns to interview people every
four months, so this is not as much of a problem as it could be, but it means
that low income people tend to over-report their income relative to those
higher up.  This typically will bias down
estimates of how much more one group earns than another.

Specific Ability:

People tend to
pick the career they will succeed at. 
Thus those who are bad at some jobs but good at jobs available to law
degree holders will gravitate towards law. 
But, in fact, had they not gone in to law they might end up doing very
badly.  This has several effects – it
means that we will tend to underestimate the value of law school to those who
choose law because that is their particular advantage but at the same time we
may be overestimating it for those who are not choosing law.  It is hard to know for sure if this is a
large effect or not.  It is very
difficult to nail down statistically.

The 25^th Percentile:

When we look at the 25th percentile earnings lawyer we use quantile regression to make these ability adjustments to the data before comparing them to the 25th percentile earnings BA, thus we’re correcting for ability as much as possible.  Though not reported in the paper we find the ability gap (that we adjust for in our lifetime value estimates) between BA and law grads is about eight percentage points at the 25th percentile.  This is completely in line with what we found at the mean both in the SIPP and in our more refined estimates from the NELS survey.  It is possible that the gap is larger (or smaller) at the bottom than our data show, so that would be a great place for future research, but we think this is the best currently available estimate, especially given issues (1) and (2) biasing the premium down.

 

Occupation
and the versatile law degree

A very large
fraction of law degree holders do not end up practicing law.  For some, this is a disappointment and for
others it is a preferred outcome.  We
include all these people in our estimates of the value of a law degree.  That is because the question we are
interested in answering is the value of the law degree, not the earnings of the
subset of individuals who practice law.  
Controlling for occupation would have been methodologically improper
because occupation is an outcome variable, not a pretreatment covariate.

As MIT labor economist
Joshua Angrist and LSE labor economist Jörn-Steffen Pischke explain in Mostly Harmless Econometrics:

Some
variables are bad controls and should not be included in a regression model even when their inclusion might be expected
to change the short regression coefficients.  
Bad controls are variables that are themselves outcome variables . . .
That is, bad controls might just as well be dependent variables too. The
essence of the bad control problem is a version of selection bias . . .

To
illustrate, suppose we are interested in the effects of a college degree on
earnings and that people can work in one of two occupations, white collar and
blue collar. A college degree clearly opens the door to higher-paying white
collar jobs.  Should occupation
therefore be seen as an omitted variable in a regression of wages on
schooling?  After all, occupation is
highly correlated with both education and pay. 
Perhaps it’s best to look at the effect of college on wages for those
within an occupation, say white collar only.   

The problem
with this argument is that once we acknowledge the fact that college affects
occupation, comparisons of wages by college degree status within an
occupation are no longer apples-to-apples, even if college degree
completion is randomly assigned . . . [because of selection bias].

We
would do better to control only for variables that are not themselves caused by
education. 

In a recent
article, David Neumark and co-authors also include a helpful explanation of
the problems with controlling for occupation and “underemployment”,
or relying
on BLS occupational earnings projections when trying to measure education
earnings premiums:

“For
nearly every occupational grouping, wage returns are higher for more
highly-educated workers even if the BLS says such high levels of education are
not necessary. For example . . . for management occupations, the estimated
coefficients for Master’s, professional, and doctoral degrees are all above the
estimated coefficient for a Bachelor’s degree, which is the BLS required level.
. . ..

If the
BLS numbers are correct, we might expect to see higher unemployment and greater
underemployment of more highly-educated workers in the United States.  As noted earlier, we do not find evidence of
this kind of underemployment based on earnings data. Similarly, labor force
participation rates are higher and unemployment rates are lower for more highly
educated workers.”

Even economists at the BLS
emphasize that educational earnings premiums, and not BLS employment
projections, are the key measure of the value of education:

The general problem with addressing the
question whether the U.S. labor market will have a shortage of workers in
specific occupations over the next 10 years is the difficulty of projecting,
for each detailed occupation, the dynamic labor market responses to shortage
conditions. . . .

Since the late 1970s, average premiums paid
by the labor markets to those with higher levels of education have increased.

It is the growing distance, on average,
between those with more education, compared with those with less, that speaks
to a general preference on the part of employers to hire those with skills
associated with higher levels of education.

 

Long term versus
short term

We value a law degree based on the present value of a
lifetime of increased earnings. The valuation literature is unambiguous about
the correct time period to value the cash flows generated by an asset:  the entire life of the asset.  The delay and higher risks of cash flows in
the distant future are already taken into account through the application of a
discount rate and the present value formula.

Our approach, using the typical span of a working life and
discounting back to present value, is the correct one for the majority of
potential law students who obtain their degrees relatively early, in their 20s
or 30s.  A much shorter time period would
only be appropriate for individuals who complete their law degrees later in life,
closer to retirement, or who anticipated working only a few years during their
lifetimes.

In a recent post post, Brian Tamanaha suggests that
the difference between his approach and ours is that he focused on the
short-term value of a law degree while we focused on the long-term value of a
law degree.    

Michael
Froomkin wonders if law degree holders will experience a cash crunch early
in their careers when their incomes are lower and debt levels are higher. 

It is unlikely that a debt financed law degree would create
a cash crunch.  Young bachelor’s degree
holders also have lower incomes early in their careers.  The earnings premium associated with the law
degree will typically exceed required debt service payments on law school debt,
particularly in light of the availability of extended repayment, deferment, forbearance,
and income based repayment plans.  Graduate
degrees can readily be financed entirely with federal student loans.

The costs of delayed repayment (i.e., higher interest) are
already taken into account in our present value calculation, because we
discount back at the weighted average interest rate on law school debt.  We’re pretty conservative in this respect: we
ignore the (likely) possibility that students will prepay their highest
interest rate debts first.  Indeed, After the JD II found evidence of
rapid pre-payment of law school debt.

 

 

Our results suggest that most young law degree holders most
of the time likely have more positive cash flow—even after debt service
payments—than they would likely have had with only a bachelor’s degree.

Because the economic value of a given level of education can
generally be maximized by completing that level of education early—and thereby
maximizing the number of years of subsequent work with the benefit of higher
wages from the education earnings premium—delaying graduate school to try to
time the market is a high-cost strategy.  
And timing the market three or four years in advance is difficult. 

We recommend long-term historical data on lifetime earnings
premiums as a guide rather than short-term fluctuations in starting
salaries.  Indeed, starting salaries tell
us very little—earnings premiums are what matters, and there is no evidence
that premiums have compressed, even for the young. 

 

 

In a supplemental exploratory analysis using ACS data, we
find some evidence that post 2008 cohorts of individuals who are probably young
law degree holders (professional degree holders excluding those in medical
practice) continue to have the same earnings advantage over bachelor’s as they
had prior to 2008.

Ben Barros has done some interesting work comparing outcomes 9 months after graduation to subsequent outcomes for recent graduates of Widener Law School.

 

The broader labor
market

Tamanaha argues that law continues to be depressed while the rest of the labor market has recovered.   The data does not support this
view.  As can be seen from the chart
below, the broader employment population ratio remains below 2007 levels across
levels of education, and the more educated continue to be more likely to work
than those with less education.

 

 

 

Present value and
opportunity costs

Many of our critics have made mistakes relating to net
present value, opportunity costs, and direct costs of a law degree.  Some general guidelines are provided below.

1. Everything has to be discounted back to the start of law
   school
2. Costs can't be something that is already taken
   into account through opportunity cost of lower in school earnings
3. Costs have to be something that the law student would
   only incur for law school and not matched by any other comparable expense if
   the student were a working BA; the cost has to be something that is a necessary
   expense to attend law school
4. The cost can't provide consumption benefits that justify
   the greater expense
5. The cost has to be what the student actually spends, and
   not hypothetically what a student might have spent if the student had paid full
   price

For example, since living expenses would be
paid out of higher earnings if law students were working, we have already taken
cost of living into account.  

Since many students receive scholarships and
grants, full-sticker tuition should not be used as a base-case.

Our estimates of in-school earnings are
based on data from the SIPP and other Census Bureau Surveys.  As we note in footnote 101:

Footnote
101: We assume that law students earn $5,000 in their first year, $7,000 in
their second year and $12,000 in their third year with part time and summer
work, for a total of $24,000 during law school. SIPP data suggests typical
three-year in-school earnings between $21,800 (median) and $48,000 (mean) for
fulltime graduate and professional school students. Census data suggests
substantial work hours among fulltime graduate and professional students See
Jessica Davis, U.S. CENSUS BUREAU, SCHOOL ENROLLMENT AND WORK STATUS: 2011
(Oct. 2012).”

 

Thanks and Goodbye

It’s been a
fun couple of weeks.  We’d like to thank
Brian Leiter, Brian Tamanaha, and others for the wonderful opportunity they’ve
given us to explain our research to a wider audience.  And I’d like to thank Frank McIntyre for his
contributions to this post and previous posts.  This will hopefully be our last post about The
Economic Value of a Law Degree, at least for a little while.