Associates of the World, Unite!

David Luban

A few days ago, Brian posted here on the subject of the economics of corporate law firms. Sandy Levinson responded:

One may be averse to applying Marxist analysis these days, but I think the relationship between young associates and their partners is precisely what Marx analyzed as expropriation by bosses of the surplus value generated by their workers. It's hard to feel much sympathy for a "working class" making $160,000/year, but, presumably, they’re generating much more than that in fees that are appropriated by the partners, since, even at $800/hour, the partners can't generate enough billable hours to add up to their million dollar income.

I’d like to expand on Sandy’s comment; I’ve thought for years that large law firms might be one of the handful of venues in which volume 1 of Capital applies in almost pure form.

With overhead, an associate costs a law firm about double her salary. So, a first-year associate at a blue-chip law firm who makes $150,000 costs the firm $300,000. On average, first-year associates’ billing rate is in the $200/hour vicinity (higher in the major law firms). Thus the associate must bill 1,500 hours simply to pay for herself. Because not every hour can be billed, that is about 1,800 hours of actual work, or 36 hours per week over a 50-week work-year – six hours a day, six days a week. This is what, in volume 1 of Capital, Marx called the paid part of the laborer’s day: the part of the day in which the worker recoups the price of her labor-power or, in Marx’s terms, reproduces her labor-power.

The rest of the day is the "unpaid labor" generating the surplus-value that the partners appropriate. Remember, each additional billable hour over and above the paid part of the day nets $200 to the partners. An associate billing 2,200 hours a year is billing 44 hours a week (and working 53), yielding 8 hours a week of surplus labor, or $1,600 to the partners each week: $80,000 each year. If the associate goes up to 2,500 billable hours a year, she is billing 50 hours a week (and working 60), yielding fourteen hours of surplus labor, or $2,800 to the partners. Each year, that’s $140,000 of profits to the partner per associate, as compared to $80,000 if the associate works "only" 53 hours a week. So, the partner stands to profit an extra $60,000 annually by inducing the associate to up her hours from 8.8 hours a day, six days a week, to 10 hours a day, six days a week.

Next, consider how leveraged the partnership is (that is, the associate-to-partner ratio). Obviously, it is risky to take on an extra first-year associate, who costs $300,000 for the year; but, if you have enough clients to generate the work, you stand to gain between $80,000 and $140,000 a year (more, if you can get the associate to go up to 12 hours a day or to work on Sundays) by risking the investment on the extra associate. The most prominent and profitable firms are also the most leveraged: their prominence brings in the clients, and their leverage brings in the profits. Depending on whether the associates bill 2,200 or 2,500 hours per year, four-to-one leverage yields each partner between $320,000 and $560,000, over and above what the partner brings in through her own billings.

Of course, the profits per partner depend on maintaining a high associate-to-partner ratio. That gives the firm a strong inducement to make it very hard to become a partner. The higher the firm’s leverage, the more intense the competition between the associates for partnership. Profits per partner and competitiveness among associates rise and fall together.

The easiest way for associates to compete with each other is by lengthening their work-day, in an arms race that challenges what the human body and soul can bear. Ten hours a day, six days a week? Why not twelve hours, seven days a week? Why not fourteen? This is great for the partners, who (remember) net $200 for each additional hour an associate bills. Furthermore, if the associate is doing more demanding work, for wealthier clients, the firm can bill the associate’s time at a higher rate than the baseline of $200 per hour.

However, the quality of the associate’s work will not necessarily enhance her chances to make partner, because regardless of the absolute quality of the work, the partnership needs to winnow out associates in order to maintain the leverage on which per-partner profits depend. In a law firm leveraged four-to-one, three out of every four associates must fail to make partner, regardless of their lawyerly excellence in absolute terms. (All of this was explained years ago in Marc Galanter’s and Thomas Palay’s path-breaking Tournament of Lawyers.)

The result is just what Karl Marx predicts: the "capitalist" (here, the law partner) has an overwhelming incentive to intensify and lengthen the associate’s work day, and put more competitive stress on the associate.

No wonder associates bail out as soon as they can. Yet this has bad effects on the law firms: after all, they invest a lot of money training associates, and the high turnover rate is wasteful in both human and economic terms. The firms are hemorrhaging young people. (There’s a hemorrhage at the other end as well, as large firms force many partners out in their early 50s because their billing rate is too high, and the firm would rather dump them than adjust their rate downward, due to the pressure that would put on its entire rate-structure. But that’s another story for another post.) In human terms, higher turnover means lower interpersonal loyalty at large firms, which goes with lower collegiality, greater alienation, greater temptation to commodify intrafirm professional relationships, more emphasis on the bottom line, greater incentive to intensify and lengthen associate’s work days, and – therefore – higher turnover. It’s a vicious spiral, and thoughtful law partners have lamented it for years without having any idea how to stop it.

Couldn't the partners simply settle for less money? The problem is that then higher-paying firms will lure away the firm's stars -- their rainmakers and the rainmakers' clients -- and the firm is likely to collapse. Marx understood this, too; he thought it was fatuous to suppose that exploitation, together with the intensification and lengthening of the work day, could be ended if only individual capitalists were "less greedy." Few non-Marxist economists would disagree.

Furthermore, as Galanter and Palay explain, there is another good reason why firms emphasize profits over other values. Suppose that every lawyer in a firm is asked to rank-order the top ten things he or she values about the job. Some emphasize the money; some, interesting clients; some, the opportunity for pro bono; some, flexible and humane hours; some, an interesting practice area; some, the opportunity to live abroad; some, avoiding lots of travel; some, great colleagues. And so on. Money might not be at the top of the list for many lawyers in the firm (maybe not for any); but money will almost always be among the top three or four. More importantly, money may be the only thing that is in the top three for every single lawyer in the firm. That makes money the easiest thing to coordinate on. The larger the firm, the harder it is to customize a package for each lawyer, and the more likely it is that every lawyer will confront more or less the same package. You will simply not be offered the option of less money and more collegiality; the high-money-low-other-stuff package becomes the off-the-rack choice for everyone.

The big, unanswered question: how long can a system with these characteristics maintain itself? Indefinitely? Of course, Marx would have said that the point isn't to analyze the world; the point is to change it.
Posted 11:44 AM by David Luban [link]