Like it or not, most Biglaw associates have returned to the office, with 90% of Am Law 100 firms now encouraging or requiring a specific number of days per week of in-person work. In an environment where “work from anywhere” is no longer viable for most lawyers, and where inflation remains high, cost of living in the market where your office is located has become more important than ever.
Cost of living and salaries are closely connected in many industries. Some legal sector jobs exhibit that correlation. Consider as an example a federal judicial clerk with one year of practice experience and bar passage (i.e., paid at the Grade 12, Step 1 of the Judicial Salary Plan scale). Because federal judicial pay rates are adjusted based on cost of living, that clerk would be paid $102,489 in San Francisco versus $89,848 in Dallas.
In Biglaw, however, cost of living is largely irrelevant to salary scales. Top firms pay associates the “New York” rate in several “major” markets, including the Bay Area, Los Angeles, Chicago, Houston, Dallas, Boston, and DC. From a cost of living perspective, paying New York salaries in San Francisco makes sense. In Houston or Chicago? Not so much.
It’s good to be a Houston Biglaw associate
A November 2021 NALP analysis of median private practice first-year associate salaries relative to cost of living found stark differences in associate buying power. NALP calculated that Houston and Dallas first-year associates each enjoyed more than double the buying power of their New York counterparts.
NALP’s calculations may actually understate the advantage enjoyed by Houston and Dallas associates because NALP considered only the relative cost of goods and services. But Houston and Dallas don’t just offer lower prices, they also feature no state income tax. For highly paid Biglaw associates, tax savings can make a significant difference in enabling fast wealth accumulation.
|City||Buying power index (NYC = 1.0)||Marginal state + local income tax rate for single first-year Biglaw associate|
The NALP survey looked at private practice salaries overall, rather than Biglaw salaries exclusively. If the analysis had been limited to Biglaw offices, the results would surely have been somewhat different. But the broader point is unassailable: associate salaries are poorly correlated with cost of living.
Billing rates are a key driver
If cost of living isn’t driving associate salaries, what is? In short, billing rates. Houston and Chicago may not be high-cost cities, but they have plenty of clients willing to pay firms top-dollar rates. Viewed from that lens, paying top salaries in these markets seems fair: associates are being compensated for the value they create. Over time, as clients become more accustomed to the notion of top legal talent being based in regional cities, we expect to see more lawyers being paid New York rates in cities across the country, especially with Biglaw firms expanding aggressively in secondary markets. That’s not to say that median associate salaries in secondary cities will rival the New York level. But for lawyers with top-flight credentials, geographic arbitrage may become increasingly possible and alluring.
If you’re a New York or Bay Area associate tired of putting up with relatively low buying power, you may wish to consider a lateral move to Texas, Chicago, or Atlanta. If working from the beach in Mexico is no longer in the cards, at least consider the wealth accumulation potential of a lower cost city where firms pay New York rates!
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