THE JUSTICE GAP: A MARKET-BASED PERSPECTIVE
BACKGROUND
The for-profit legal market describes the network of lawyers, law firms, and other providers that offer legal services. The legal market can generally be categorized into individual client and organizational client sectors.[1] The individual, or PeopleLaw sector, describes lawyers who provide legal services to individuals, whereas the organizational sector refers to lawyers who primarily serve businesses, corporations, and government entities. As discussed in The Prevalence of Civil Legal problems section of the NORC report, 73 percent of California households experienced at least one civil legal problem in the past year, with an average of six; 85 percent of these problems received inadequate or no legal help. This statistic suggests that there is significant demand for the services of the PeopleLaw sector. To better understand the California legal market as a whole, the State Bar of California commissioned a 2024 Legal Market Landscape Report. This report updated a 2018 study, the 2018 Legal Market Landscape Report, by adding more detailed analyses on California. One of the key findings of the 2018 report was that three-quarters of all law firm revenue was generated from organizational clients. The 2024 Legal Market Landscape Report corroborates the significant divide between the organizational and PeopleLaw sectors in the California context. The narrative that follows is a summary of the report's key findings and conclusions.
LEGAL MARKET OVERVIEW
California’s legal market was valued at an estimated $57.8 billion in 2022,[2] encompassing the largest legal economy in the nation for individual clients by a wide margin of $14.1 billion. Despite having the largest PeopleLaw sector by consumer spending in the country, the majority of California’s legal market revenue (75.6 percent) was generated from organizational clients.
Table 3 summarizes the estimated size and composition of the five largest state legal services economies.[3] In 2017, these five states accounted for 50.9 percent of the national legal services economy.
Table 3. Five Largest State-Based Legal Economies
Source: Data from the 2017 Economic Census, U.S. Census Bureau, which excludes tax-exempt organizations such as legal aid. Adjusted based on U.S. Gross Domestic Product (GDP) through 2022. Population data from U.S. Census Bureau. Table and calculations by Legal Evolution PBC.
Figure 25 provides a more detailed look at the estimated size and breakdown of California’s $57.8 billion legal services market.[4]
Figure 25. California Legal Services Economy
Source: Estimates based on U.S. Census Bureau Economic Census (2017), North American Industry Classification System (NAICS) 5411, adjusted for change in California Gross Domestic Product (GDP). Dollar amounts are shown in billions.
Of California’s $57.8 billion legal services market, $40.5 billion of the total receipts for all organizations came from private for-profit businesses, $1.04 billion from nonprofit organizations, and $2.2 billion from state, local, and federal governments.
ORGANIZATIONAL SECTOR
The organizational sector comprises lawyers working in private practice law firms, lawyers working in-house, and lawyers working for the government. Table 4 provides a breakdown of the number of employed California lawyers within each of these practice settings.[5]
Table 4. Number and Average Salary of Lawyers by Practice Setting, 2023, United States and California
Source: Data from U.S. Bureau of Labor Statistics, employment for Lawyers (Standard Occupational Classification code 231011), May 2023. Calculations by Legal Evolution PBC. "All employed lawyers" are limited to those working in private practice, government, and in-house. The column "percent of lawyers in California" reflects the percentage of lawyers nationwide who are in California.
Most of the revenue from California’s organizational sector (95.6 percent) is generated by traditional law firms. Approximately 15 percent of California lawyers working in private practice work for AmLaw 200 firms.[6] The 147 AmLaw 200 firms based in California generated about $19 billion in fiscal year 2022, nearly one-third of the state’s overall $57.8 billion legal services market. There are approximately 7,000 AmLaw 200 partners based in California, and they earned an average compensation of $1.4 million in 2022. An additional 10,000 California lawyers work as associates or counsel in AmLaw 200 firms, where the average entry-level annual salary was $225,000 in 2024. In contrast, the majority of California lawyers work at smaller law firms that serve a combination of individual clients and small- to medium-sized businesses.
Of California’s almost 780,000 businesses, about two thirds (527,000) generate less than $1 million in revenue annually. Using the average number of employees for companies in the lower-revenue categories, most California businesses fit the U.S. Small Business Administration’s definition of a microbusiness (one to nine employees).
Although a specific subset of law firms serve these small businesses, they remain an important population to highlight, as they are at risk of being underserved by lawyers. To better understand the legal needs of small business owners in California, the State Bar of California partnered with the California Office of the Small Business Advocate (CalOSBA) to learn about small business legal needs and barriers that prevent those needs from being met, and to identify areas where the State Bar might help (see "Legal Needs of California’s Small Business Owners" in this report). In 2023, 40 percent of small business owners reported having at least one legal need, with about half of those reporting a legal need relating to contracts and agreements. Approximately 58 percent of small business owners indicated that their legal needs were not completely met at the time the survey was taken. Worry about the cost involved with talking to a lawyer was reported as small business owners’ most common barrier to getting their legal needs met. They also reported not knowing how to find legal help and not having the time to get legal help as other significant access challenges.
As shown in table 5, California’s local government sector has added lawyers considerably faster than the national average (16.0 percent versus 6.6 percent);[7] this increase may be related to several factors. First, California’s sizable population has resulted in many large cities and high-density counties, making the establishment of municipal legal departments more cost-effective than reliance primarily on law firms. These highly populated cities, counties, and regions may also contribute to increased complexity and breadth of programs administered, similarly triggering a need for additional lawyers.
Table 5. Growth of Government Lawyer Employment and Salaries in California and the United States
Employment
Average salary
Source: U.S. Bureau of Labor Statistics, Occupational Employment and Wage Statistics, Standard Occupational Classification code 231011, for 2016 and 2023. Calculations by Legal Evolution PBC.
PEOPLE LAW SECTOR
The gradual decrease in the share of legal services for individual clients is linked to several trends that relate to both supply and demand for those services.
Supply
Over time, the share of the legal market between individual and organizational clients has gradually shifted, with a continuous decrease in the proportional share of the PeopleLaw sector. As shown in figure 26, the PeopleLaw sector constituted over 50 percent of the total national legal market in 1972, but just over 25 percent by 2017.[8] While similar historical California data is not available, the share of the legal market serving individual clients in California was 24.4 percent in 2022.
Figure 26. Percentage of Total U.S. Legal Receipts by Type of Client, 1972 to 2022
Sources: Heinz et al., Urban Lawyers: The New Social Structure of the Bar (2005) (citing U.S. Census Bureau data for 1972 and 1992); U.S. Census Bureau, Economic Census (2007, 2017). Data from the 2017 Economic Census, U.S. Census Bureau, which excludes tax-exempt organizations such as legal aid. 2022 estimate reflects California specifically and is based on U.S. Census Bureau Economic Census (2017), NAICS 5411, adjusted for change in California GDP through 2022.
The dramatic increase in the percent of lawyers employed as in-house counsel is one factor contributing to the decline in the PeopleLaw sector. Figure 27 depicts the significant uptick in the number of lawyers working in-house relative to other practice settings across the nation. This population grew by more than 300 percent between 1997 and 2023.[9] The number of attorneys working in any type of law firm grew by only 50 percent during the same period. Table 6 highlights this rise in California specifically from 2016 to 2023 and shows that the number of in-house lawyers grew by 45 percent during this period, compared to just 20 percent for law firms and 14 percent for government lawyers.[10]
Figure 27. Percent Change in Number of Employed Lawyers by Practice Setting, 1997 to 2023
Source: Data from U.S. Bureau of Labor Statistics, 1997 to 2023. Calculations by Legal Evolution PBC.
Table 6. Headcount and Average Salaries of California In-House, Law Firm, and Government-Employed Lawyers, 2016 and 2023
Source: Data from U.S. Bureau of Labor Statistics. Calculations by Legal Evolution PBC.
The considerable growth in the number of attorneys employed in the in-house counsel practice setting may be partially attributed to compensation. From 1997 through the mid-2000s, average law firm and in-house salaries were relatively comparable. After 2008, average in-house salaries steadily diverged from the law firm average. In 2008, the gap between these two subsectors was $3,300; by 2023, it had increased to $23,600. Figure 28 provides insight into the national average salary trendlines of in-house lawyers relative to lawyers working in law firms and in the government.[11] Looking at more recent average salaries in California specifically, the average salary of a lawyer working in-house ($254,544; see table 6) was meaningfully higher than that of a lawyer employed in a law firm ($215,890). This gap translates into an average salary differential between in-house and law firm lawyers that more than doubled from $16,590 in 2016 to $38,654 in 2023.
Figure 28. Average Lawyer Salaries by Practice Setting, 1997 to 2023
Source: Data from U.S. Bureau of Labor Statistics. Calculations and graphic by Legal Evolution PBC.
A problem that lawyers working in law firms serving individual clients often face relates to the economic burdens of running these practices. Drilling down on solo and small-firm lawyers, the compensation gap becomes even more noticeable. Clio, the leading practice management software for solo and small-firm lawyers, generates an annual Legal Trends Report using data aggregated across its platform. This data breaks down billing rates and related metrics by practice area and geography. In 2023, the average hourly billing rate of a California lawyer across all practice areas was $308. While this rate is not problematic on its face, Clio data persistently shows that California lawyers struggle to find legal work, with only a 33 percent utilization rate.[12] Further, of the 33 percent of work that was billable, only 82 percent was actually billed; of that, 88 percent was collected. As a result, a California lawyer working 50 hours per week would expect to generate approximately $146,687 in gross income, before accounting for any business or operational expenses. These realities may prevent lawyers from being able to sustain their practices. This imbalance—long hours for moderate pay in solo and small law firms compared to the sizeable salaries and predictable work hours of in-house and government lawyers—may also be contributing to the declining supply of lawyers serving individual clients.
To provide a national perspective, table 7 estimates the breakdown of law firm revenue based on the type and size of client across the United States.[13] The numbers highlight a stark contrast in the average dollar amount spent per client, with just $278 spent by individual clients compared to $4,704 and higher by organizational clients and government entities.
Table 7. Estimated Breakdown of 2022 Law Firm Revenue Based on Type and Size of Clients
Source: Client counts from U.S. Census Bureau programs, including 2017 Statistics of U.S. Businesses (SUSB), 2017 Economic Census, 2022 Census of Governments, and 2022 Fortune Magazine. Law firm receipts allocated based on 2017 Economic Census class of customer data for NAICS 541110 and published estimates of legal budgets based on company size, adjusted upward based on U.S. GDP through 2022.
Demand
Between 1987 and 2023, there has been a significant decline in the spending on paid legal services among U.S. households when compared to other essential household expenses. The U.S. Bureau of Labor Statistics tracks the prices of various goods and services to calculate the Consumer Price Index for all Urban Consumers (CPI-U) and weights the relative importance of a good or service in the overall CPI basket, which is determined by surveys of household spending. In 1987, households allocated an average of nearly 43.5 cents per $100 to legal services. However, by 2023, this figure dropped to only 26.7 cents, a nearly 40 percent reduction. In contrast, average spending on both medical care and college tuition increased by more than 50 percent during the same period.
Low-income Californians are also experiencing difficulty in accessing the legal services that are specifically meant to address their needs. Legal aid refers to free or low-cost legal services provided to ensure access to justice for individuals who might otherwise not be able to afford legal help. Eligibility for these services is based on the federal poverty level (FPL). To assist Californians at the lower end of the income distribution, state law was changed in 2022 to increase the threshold for legal aid eligibility, from 125 percent to 200 percent of the FPL. Table 8 compares California’s new 200 percent FPL threshold with California median incomes based on household size.[14]
Table 8. Legal Aid Eligibility and California Median Income, by Size of Household
Source: 2024 Poverty Guidelines (48 Contiguous States), U.S. Department of Health and Human Services and U.S. Census Bureau, 2022 American Community Survey, B19019.
For households of one to four people, the median California income (i.e., 50th percentile) is roughly twice the threshold for legal aid. Similarly, the median income of larger households exceeds legal aid threshold by $30,000 to $40,000 annually. Between 2019 and 2022, the percentage of California adults who qualified for legal aid based on the FPL grew from 16 percent to 27 percent.[15] Even with more generous qualifying levels, legal aid continues to cover a relatively small subset of California’s population. Unfortunately, even among the newly eligible low-income Californians who seek legal help, State Bar-funded legal aid organizations report they can only fully serve 30 percent of eligible civil legal problems presented to them by low-income Californians.[16]
CONCLUSION
Over time, the national legal market has shifted, from predominantly serving the PeopleLaw sector in the early 1970s to primarily serving the organizational market in 2017. While historical California data is unavailable, the state’s legal market has similarly transitioned toward primarily serving organizational clients as opposed to the PeopleLaw sector of the market, widening the justice gap for everyday Californians. According to the State Bar of California’s 2024 Justice Gap Report, 73 percent of Californians experienced at least one civil legal problem in the past year; 33 percent reported “five or more household problems.” Across all income groups, this trend resulted in an average of six legal problems per household, with 85 percent of legal problems receiving inadequate help or no legal help at all. On the demand side, the public has started to place less importance on legal services due to rising costs both for these services and for other goods and services deemed more essential. The shift in the legal market towards primarily serving larger organizational clients nationally seems to have also left California's small businesses overlooked.