Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms

Earnings inequality has increased substantially since the 1970s. How much does this re‡ect decreases in coordination costs that allow individuals to better exploit returns to skill? We provide evidence on this question using con…dential Census data on U.S. law o¢ ces. We …rst show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the distribution of partner-associate ratios across o¢ ces changed in ways consistent with the hypothesis that coordination costs fell during this period. We then propose a “hierarchical production function”in which output is the product of skill and time and estimate its parameters, applying insights from the equilibrium assignment literature. We …nd that coordination costs fell broadly and steadily during this period, such that hiring one’s …rst associate leveraged a partner’s skill by about 30% more in 1992 than 1977. We …nd also that changes in lawyers’hierarchical organization account for about 2/3 of the increase in earnings inequality among lawyers in the upper tail, but a much smaller share of the increase in inequality between lawyers in the upper tail and other lawyers. The research in this paper was conducted while the authors were Census Bureau research associates at the Chicago Research Data Center. Research results and conclusions are those of the authors and do not necessarily indicate concurrence by the Bureau of the Census. This paper has been screened to ensure that no con…dential data are revealed.