Is the paper chase a rat race? - work hours at law firms

Monthly Labor Review, April, 1997 by Constance B. DiCesare

Associates in law firms work too many hours, concludes an economic study published last year in the American Economic Review.(1) The authors used data collected from associates and partners at two large law firms in the Northeast to show that the long hours typical of such firms contradicted textbook economic theories of wage equilibrium. Professional employees at these establishments adversely selected longer-than-optimal hours because of how they perceived the role of hours worked in hiring and promotion decisions.

Long hours and economic theory. According to textbook economic theory, market competition forces firms to link work hours to the preferences of individual employees. Firms that closely match the preferences of their workers for certain hours can attract desirable employees at a lower wage. It follows that most individuals will be working the number of hours that maximizes utility, conditional on their wages.

But the traditional microeconomic model ceases to have predictive value when firms use willingness to work long hours as an indicator of some valuable, yet hard-to-observe, characteristic that helps determine whether an employee is hired or promoted. Because revenue in a law firm is shared among the partners, each individual partner's income depends on the willingness of the other partners to work hard. Direct observation of the moneymaking activities of other partners is so difficult, the researchers noted, that strong incentives arise to allow only those associates with a propensity to work very hard to become partners.

The study describes a separating equilibrium(2) in which the law firms screen out associates inclined toward short hours by instituting a strict norm that requires inefficiently long work hours. Because employees desiring short hours have an incentive to disguise themselves as long-hour workers by agreeing to work more hours than they otherwise would at their present wage, firms are forced to set hours long enough to discourage a short-hour employee from making the pretense.

Implications of the research results. Although law firms rely on billable hours as an indicator in making promotion decisions, the model used in the study is valid for other indicators. For an indicator to generate overwork, it need only be a characteristic that is an increasing function of work hours. "A rat-race equilibrium can occur among associates in [consulting firms,] even though clients are billed by the project rather than the hour," the researchers observed.(3)

They also singled out university departments (where tenured faculty benefit from the research efforts of other members of their department) and high-level managerial positions in hierarchical firms (where small differences in effort can have large effects on the organization) as situations where rat-race equilibria can occur. A rat race, they concluded, can be expected in any work group under three conditions: some of the members benefit from the productive activity of other members; the output of the group as a whole can be significantly affected by the work efforts of the individuals it comprises; and members are able to establish work norms.

A distributional issue. The researchers pointed out that partnerships in the large law firms they studied are elite positions in the legal profession, offering high earnings and opportunities for leadership in the profession at large. Thus, an effect of the rat-race equilibrium is to reduce access to powerful positions for those unwilling to work excess hours early in their careers. "This selection process," the authors declared, "may have the effect, although not the intent, of keeping a disproportionate number of qualified women out of leadership positions in business and professional organizations."(4) Indeed, the male and female professionals who emerge from the rat race as winners may be personally ill equipped to address the consequences that shifting demographics have for professional and managerial employment relationships. Currently, about 41) percent of graduates from law schools are women, up from 5 percent in 1975.(5) Adapting to this shift in the legal labor force poses an enormous challenge for law firms.

"The Law at Work" is prepared by Constance B. DiCesare of the Office of Publications and Special Studies, Bureau of Labor Statistics, and is largely based on information from secondary sources.