Finance And Law: Stagflation And Legal Services
An interesting look at how solo practioners' incomes have changed over time.
Prices for products usually rise over time. Inflation varies wildly over time and between countries, but in the U.S. over the last 30 years inflation has typically been in the range of one to four percent. The legal profession has been a little different though. While the prices of legal services at top firms have risen markedly over time, the value of legal services for the mass audience of solo practitioners has not.
The IRS tracks and makes publicly available aggregated information on the earnings of folks in various professions, including legal services. As of the 2014 tax year (last year available), solo practitioner attorneys earned an average of about $51,000 in net income, based on roughly 340,000 tax returns filed by solo practitioners across the country. That compares to average net income for solo practitioners of about $70,000 in 1988.
Perhaps that net income figure is artificially depressed by attorneys including questionable business expenses or enjoying the benefits of perks that are legitimate deductions. Yet, even looking at top-line numbers, the average solo practitioner is only reporting business receipts (i.e., revenues) of about $116,000 annually. That figure has grown over time, but not by much. In 1998, the comparable revenue figure was about $85,000 annually. That translates to roughly 2.21% growth in per capita sales for the typical attorney over the 15-year period. That 2.21% is roughly the same as annual inflation for the period. Essentially attorneys have seen their wages stagnate for the last decade plus, after considering inflation.
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The broader point here is that while attorneys remain a well-regarded profession, and top attorneys at top firms make excellent salaries, the profession as a whole is facing some tough challenges. While becoming an attorney requires 7 years of schooling in most cases, other professions like engineering, nursing, and even pharmacy generally require less schooling and offer careers that pay comparably or even better than being an attorney. This reality highlights the economic rationale behind declining law school numbers.
The stark reality of what is happening to the legal profession is being driven mainly by economic and technological forces rather than bad decisions by any particular part of the legal profession. As Professor Benjamin Barton of the UT Law School noted in a CNN article last year, “the bad news has just started for these lawyers, who now face new competition from online providers of legal services such as LegalZoom and Rocket Lawyer… Virtually all of the legal work that is repetitive or simple — whether corporate document review or a basic divorce — will be automated, outsourced or handled by less expensive non-lawyers.”
If Barton is correct – and his thesis is sound from an economic standpoint – then the roughly 350,000 solo practitioners across the country may face an uphill battle for decades to come, as technology challenges their provision of services. Professional entrenchment is the typical approach in these types of circumstances, but the legal profession would be better off being open about the challenges and looking for new avenues to serve clients. In-court work cannot be automated, of course, and that is one opportunity for attorneys. Provision of professional advice to clients, especially in the risk management arena, is another. Regardless of the specific services provided, the solo-practice attorneys who rethink their value proposition will be the ones that thrive going forward. Fighting technology and progress is never a winning proposition.
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Michael McDonald is an assistant professor of finance at Fairfield University in Connecticut. He holds a PhD in finance. Michael consults extensively with organizations ranging from Fortune 500 companies to start-up businesses on financial matters through Morning Investments Consulting. Michael has served as an expert witness in legal disputes, and is an arbitrator with the Financial Industry National Regulatory Authority (FINRA). Michael can be reached at [email protected].
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