IV. Empirical Evidence

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In theory, law school graduates who have higher LSAT scores should make higher lifetime earnings¹ than those with lower scores, both across and within schools.2 To test this hypothesis, I developed a model to measure the effect of LSAT score on starting salary. The model is:

Starting Salary is a function of LSAT scores and cost of living, plus an error term. Ideally, the student's grade-point average and the law school's rank should play a part in the model, but due to these factors' high correlation² with LSAT scores, their inclusion in the model presented a problem of multicollinearity. Therefore, I could not control for other measures of student aptitude³ besides LSAT score.

I applied⁴ this model to three sets of data, including: 1.) Observations from the top 50 law schools in 1994, where LSAT scores were measured on the new scoring scale (120-180) which was implemented⁵ in 1991,3 2.) Observations from the top 50 law schools for the class of 1994, where LSAT scores were measured on the old scoring scale (10-48),' and 3.) Observations from individuals in the classes of 1993 and 1994 in one of the top 50 law schools. For the cross-school models, all variables are the medians for the school and the cost of living index applies to the nearest metropolitan⁶ city to the school.' I included the cost of living index as a variable because a large part of law school graduates (roughly one half), get their first job in the area in which they attended law school. Therefore, the cost of living should influence the median starting salary for a school. I used only the top 50 schools, as defined by U.S. News & World Report, in my model because they have the greatest variations in LSAT scores and starting salary from one rank to the next. It must be noted⁷ that a basic assumption of my model is that each graduate selects the job in which his income will be highest. Preferences for certain job categories which may average lower salaries and which may be prevalent in certain schools are not accounted for.

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The regression results show that, across the top 50 schools, LSAT scores are significantly related to starting salary, even when controlling for the cost of living in the school's location. One point on the LSAT is worth over $2,600 on the new scale and over $3,800 on the old scale in first year income alone (see Appendices I and 3). Of course, each point on the LSAT is not equal in terms of its effects on starting salary. At the high end of the scale, one point is worth much more than it is worth on the lower end of the scale. Without controlling for any other variables, a one point increase on the new scale on the LSAT (or a 1% increase at the mean) leads to a salary increase of $3,080 (8.5%, for the top 50 schools whereas a one point increase leads to only a $1,812 (6.2%) increase for all 177 schools combined (see Appendix 1). Similarly moving up along percentiles on the LSAT distribution brings higher returns at the high end. Average salaries for the top percentiles are:

However, the cross-school model overestimates⁸ the effect of LSATs on salaries. Because I cannot control for all other variables that differ between schools, the LSAT effect in the cross-model is biased⁹ upward. For example, perhaps 40% of "X" School graduates receive large starting salaries because they find a job through family connections. This upward effect on starting salaries in the model would appear to be attributed to higher LSAT scores, but in fact may be partially¹⁰ attributed to students' family status.

In order to eliminate the effects of schooling¹¹ on salaries, I tested for the relationship between LSAT scores and starting salary within one law school.6 Such a model does not allow for the effects of school quality or school reputation on an applicant¹², and so the relationship between LSAT scores and income of a graduate is biased downward. If firms pay a rate equal to performance or ability, and if the LSAT is in fact an underlying measure of ability, then even within one school, students with the highest LSAT scores will earn the highest salaries and vice-versa

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