Earnings Inequality and Coordination Costs: Evidence from US Law Firms

Using evidence from confidential Census data on US law offices, we study the extent to decreases in coordination costs are responsible increases in earnings inequality among lawyers. We show that inequality increased substantially between 1977 and 1992, and that partner-associate ratios changed in ways consistent with the hypothesis that coordination costs fell during this period. We then propose a “hierarchical production function” and estimate its parameters in each period. We find that coordination costs fell over time, so that hiring one’s first associate leveraged a partner’s skill by about 30% more in 1992 than 1977. We find also that changes in lawyers’ hierarchical organization account for about two-third of the increase in earnings inequality among lawyers in the upper tail, but much less of the increase between lawyers in the upper tail and other lawyers. New organizational efficiencies potentially explain increases in inequality among lawyers, especially among the highest earners.