Short-Term Signs for the Legal Employment Market Point Upward

Over the last few months, I’ve been generally encouraged about trends in the near-term legal employment market.  In December, we saw some momentum gather for U.S. legal employment in the form of a confluence of encouraging news, instead of a couple of positive data points bucked by a couple of negatives or (as we’d seen over the last year or two) a drumbeat of negative news.

On Friday, the Bureau of Labor Statistics published its monthly employment data, which showed a slight uptick in legal employment in January.  I report BLS data regularly, even though I don’t think it means much—it’s subject to revision the next month, and it’s almost like looking at a freeze-frame day in the stock market and trying to predict the next year.  It doesn’t tell you much.

But there’s more encouraging news.  The law firm bonus wars that began in December have continued for a couple of months.  Advise-In Solutions is less interested in the specifics of the battle than in its (now protracted) existence, keeping in mind that large law firms are outsized drivers of legal employment—even if you’re not interested in a law firm job or are attending a law school that is not a good feeder to the large firm market, what happens at large law firms matters to you.  (If you’re interested in the daily punches, David Lat and his colleagues at Above the Law are excellent sources.) 

Competitions in bonus numbers are less efforts to reward firms’ current employees than they are public relations exercises in keeping a high public profile, recruiting new associates by assuring them that specific firms are at the top of the pay scale, and generally assuring the public (including law schools and recruits) that a firm is in great financial shape and appreciates the labor of its associates.  Needless to say, during the last few years, law firms have felt little pressure to engage in such competition.  Now, apparently, they do, and that is an excellent development for 2011 law school graduates.  It indicates that recruiting may experience a significant uptick.

That belief is reinforced by the generally positive news in the last week or two regarding significant increases in 2010 law firm revenues and profits per partner.  The increases were hardly universal but look like a significant improvement over 2009.  Part of those increases was driven by increased demand for legal services, part by associate and staff cutbacks at those firms in the last several years.

Why does this matter for legal employment?  It isn’t because of some weird trickle-down economics theory.  If firms could continue to increase profits per partner without paying associates more or hiring new associates, they would (keep in mind that bonuses are one-time expenditures and therefore less important than raises in salary).  That’s not an indictment of the system, just an acknowledgment that firms are profit-driven businesses.  But, in any case, it they can’t indefinitely increase profits without more work and more bodies to do that work.  The bonus wars are one sign of stress in the system.  As I noted in December, my impression is that many top-tier law firms are reaching the top of the productivity curve with current associates and will simply need to hire more (in addition to hiring to account for normal attrition) in order to be able to continue to increase profits.  (They can also increase billing rates but, as yet, there’s little sign of that, even in “rack rates.”)

Finally, there continue to be signs that the financial markets, which drive a great deal of law firm business, are loosening.  In another post in December, I noted the increase in M&A activity in 2010 and AmLaw recently reiterated that news.  Today’s Financial Times gives reason to believe that 2011 has gotten off to a very strong start as well, noting that “covenant-lite” loans have increased sharply.  These loans were almost routine in deals at the height of the market in 2006 and 2007.  While their reemergence indicates that banks learned almost nothing from the 2007 and 2008 crash (a Financial Times editorial was an excellent summary of that view), their reemergence is a good sign for legal employment (though a bad sign for the economy as a whole, I’m afraid). 

I’ve been cautiously optimistic about the legal employment market in the medium-term for some time.  Now, I’m even hopeful about the 2011 market.

~ by Kyle Pasewark at Advise-in Solutions on February 5, 2011.

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