Free research article: Could minimum wage for trainee lawyers be a terrible idea?
By Rob Green, CEO, The GRM Group.
This is an important topic, so I will be respectful.
All of us want to be paid a fair wage, for fair days work.
And we want this for everyone.
In South Africa recently, there have been big moves by some in the industry to help install a minimum wage for trainee lawyers - so big congratulations to all involved in this.
But for now, lets look at the other side.
The Law Firms. Those that will have to pay.
(The following stats are rounded up and from various sources inc LSSA)
In SA there are 15500 registered law firms
About 5000 of them are active.
So lets say there are 5000 law firms.
Only circa 400 of those firms have more than 12 people in them.
So the bulk of the industry has between 1 - 11 people in each firm.
Every year there are circa 4750 newly minted law graduates leaving an education facility (which compounds in year) and (according to stats) only about 1000 CA positions each year.
Around 300 of those CA positions are in the biggest 20 law firms.
Meaning every year there circa 700 positions in SME law firms and one-person firms looking for CA's, across the whole country
And about 4450 students looking to fill them. Every year.
The average turnover of an SME law firm is circa R800k - 1.3m p/a, once you factor in the ever increasing cost of compliance, taxes and general running costs, the person who runs this firm is looking at a profit margin of 20-25%.
Or circa 160k-350k per year. And that year is a good, steady, less volatile year
If they even exist anymore!!!!
Note, this is just an average - a lot of law firms, make a lot, lot less.
Market Pressures.
We all know that there is a huge pressure on law firms, of all shapes and sizes, to reduce fees - hence we've seen the rapid growth of ALSPs and legal tech as alternatives to using law firms.
It could be that some of these small law firms who are based in rural and outer urban areas simply wont be able to afford a minimum wage like this.
So what could happen?
Well, one possible outcome is that the regular annual 1000 trainee positions could become 900, 800, 700, 600, 500 and so on.
There are some research reports that suggest outside of the big law firms (who continue to grow and increase revenues), the SME law firm, is suffering:
Corporate legal departments: Several studies have shown that many corporate legal departments are bringing more work in-house to reduce costs. For example, the 2020 State of Corporate Law Departments report by Thomson Reuters found that 25% of legal departments planned to decrease their use of law firms.
Alternative Legal Service Providers (ALSPs): The growth of ALSPs has been cited as evidence of clients seeking alternatives to traditional law firms. The 2021 Alternative Legal Service Providers report by Thomson Reuters, Georgetown Law, and Oxford Saïd Business School found that the ALSP market grew from $10.7 billion in 2017 to $14.4 billion in 2021.
Small and medium-sized businesses: A 2016 study by Lexis Nexis found that 40% of small law firms reported that their clients were handling more legal tasks themselves to save money.
Legal technology: The increasing adoption of legal technology solutions by businesses has been seen as a way to reduce reliance on external law firms. For instance, a 2020 Wolters Kluwer survey found that 57% of legal departments were investing in legal technology to improve productivity and reduce costs.
And whilst these studies were a few years back, things have not got better since.
Further Analysis.
Jordan Furlong has written about this topic and the changing structure of a law firm at length. See his SubStack here
We must be wary of what the installation of a minimum wage structure may do to an already challenging job market.
And to do this, I want to look at history:
10 Examples of where minimum wage hasn’t worked, across different countries and sectors.
Seattle's $15 minimum wage (2015-2019): Some studies suggested that Seattle's rapid minimum wage increase to $15/hour led to reduced hours for low-wage workers, potentially lowering their overall income. A 2017 University of Washington study found that the average low-wage worker lost $125 per month due to reduced hours.
Puerto Rico's application of US federal minimum wage (1938): When the US federal minimum wage was applied to Puerto Rico some economists argue it led to significant job losses and economic disruption. The island's economy was less developed than the mainland US, and the wage floor was relatively higher compared to local wages, pricing out many workers.
Indonesia's minimum wage increase (1990s): A World Bank study suggested that minimum wage increases in Indonesia during the 1990s led to decreased employment in small firms and slowed job growth in the formal sector.
Germany's introduction of a national minimum wage (2015): Some studies suggested that the introduction of Germany's first-ever national minimum wage in 2015 led to a reduction in marginal part-time employment ("mini-jobs"). Some lost employment altogether.
Hungary's minimum wage increase (2001): A substantial minimum wage increase in Hungary in 2001 (by about 57%) was associated with job losses in small firms and in regions where wages were generally lower. Some economists argued this exacerbated regional economic inequalities.
France's high minimum wage (ongoing): France has one of the highest minimum wages relative to median income among OECD countries. Some economists argue this contributes to the country's persistently high youth unemployment rate, as it may price young, inexperienced workers out of the job market.
American Samoa's application of US minimum wage (2007): When US minimum wage laws were increasingly applied to American Samoa starting in 2007, it reportedly led to significant job losses in the tuna canning industry, a major employer in the territory.
South Africa's agricultural minimum wage (2013): A sharp increase in the minimum wage for farm workers in South Africa in 2013 was followed by a decrease in agricultural employment. Some studies suggested that farmers responded by increasing mechanisation and reducing labour intensity.
New York's fast food worker minimum wage increase (2015-2021): New York implemented a series of minimum wage increases for fast food workers, reaching $15 per hour in New York City by 2018 and statewide by 2021. Some restaurant owners reported cutting staff hours, reducing hiring, and increasing automation in response. A 2019 New York City Hospitality Alliance survey found that 77% of full-service restaurants reduced employee hours, and 36% eliminated jobs in response to the wage increases.
Ontario, Canada's minimum wage hike (2018): In 2018, Ontario raised its minimum wage from $11.60 to $14 per hour, a 21% increase. A study by the Bank of Canada estimated that this sharp increase resulted in the loss of about 80,000 jobs. Critics argued that the rapid implementation didn't give businesses enough time to adjust.
So lets recap at what could possibly happen if a minimum wage is introduced for Lawyers across African countries:
Possibly leading to….
Reduced hours.
Pricing out many workers.
Decreased employment in small firms and slowed job growth.
Lost employment altogether.
Job losses in small firms, and in regions where wages were generally lower.
Contributes to the country's persistently high youth unemployment rate, as it may price young, inexperienced workers out of the job market.
Significant job losses.
Increasing mechanisation (tech) and reducing labour intensity (hiring).
Reduced employee hours, and eliminated jobs in response to the wage increases.
Rapid implementation didn't give businesses enough time to adjust.
Obviously it could also be a positive move. Investment in the best talent, retention and increased productivity, could all be outcomes of the introduction of a minimum wage.
But in all the furore of a minimum wage for trainee lawyers it is important to take a realistic look at the industry, how it is structured, and what this will do for growth.
Add to this, the pressures on law firm revenue.
There are always two sides of the story.
Be careful what you wish for and be aware of the pitfalls, clients are not spending more money on legal services, and further pressure on costs, is only going to harm the bulk of the industry.
rob@thegrmgroup.com