Observations Observations

March 3, 1997

Rat Race

Why do young lawyers in large law firms work such absurdly long hours? Why, to "make partner," of course. After a probationary period, junior lawyers (called associates) are either offered a well-paid partnership or required to leave; it's "up or out." Associates work hard not just to earn their current salary, but to compete for the few lucrative partnership slots.

A study by Renée Landers, James Rebitzer, and Lowell Taylor, appearing in the June 1996 American Economic Review, provides new insights on the phenomenon. The authors conducted a survey on the importance of various factors in the promotion decision. The law-firm partners responded that the quality of the associate's work was of paramount importance. After that, they valued a willingness to work hard.

But how can partners effectively evaluate work quality? Each partner does not have good information on each associate, and groups within the firm often launch campaigns for "favorite sons" (or daughters). As comparisons become subjective, partners look for objective measures of performance. A key indicator to emerge is hours worked.

There is an obvious link between having worked long hours and the willingness to do so again. The connection between hours and quality of work is less clear. Nevertheless, Landers, et al. find that about a third of all partners see hours as a very important indicator of quality.

If partners pay attention to hours, associates fixate on them. The survey finds that associates see hours as an important indicator of quality and the most important factor in the promotion process. Hours thus become a signal that associates can send to the partners. And send it they do.

-- Hoyt Bleakley


Financial Ed

It seems that many people have a lot to learn about planning for retirement. Workers today are increasingly dependent on their retirement-savings decisions. But participation rates, contribution levels, and investment choices in 401(k)-type plans are often inadequate to maintain their standard of living in retirement.

Employers want workers to be able to retire, and many encourage 401(k) participation by matching employee contributions. B. Douglas Bernheim and Daniel Garrett, of Stanford University, and John Scholtz, of the University of Wisconsin, find that a match increases the number of people participating by 15 percent, and that the size of the match is relatively unimportant.

More interestingly, they find retirement education programs yield similar increases. Peter Right, principal at the Waltham office of Hewitt Associates, says that education programs also encourage employees to take "appropriate" investment risks -- something a match cannot do very effectively. Worksheets and interactive software help employees project their financial needs and the returns and risks of different investments; some employer plans offer prepackaged portfolios for specific investor profiles, notes Joseph Mongelli, principal at the Boston office of Towers-Perrin.

Many employers, however, are nervous about involving themselves in the finances of their employees. Right points out that these programs aim to educate, not to provide specific financial advice. Mongelli says that federal guidelines allow employers to distinguish between the two activities and avoid legal liability. The guidelines, however, do not address employee expectations that employers will provide a greater measure of economic security.

-- Margaret Enis


Dilemmas of School Reform

The Vermont Supreme Court recently ruled that the state's reliance on the local property tax to finance public schools violates "the right to a well-funded education on substantially equal terms." So in order to make funding more equal, Vermont legislators are crafting reforms that shift funding from the local to the state level.

Many other states have had to do the same. Some have simply raised spending in poor districts. Others, with very equality-focused policies, have capped or severely limited spending in wealthy districts as well.

Spending equalization has had mixed effects on test performance across states -- sometimes average test scores rise, sometimes they fall. But the evidence suggests that spending limits do lower test scores (albeit slightly) in wealthy districts, reports Thomas Downes of Tufts University.

California, with two decades of equalization, has among the most restrictive spending limits on its wealthy districts. Wealthy families in California have responded in several ways. Downes finds that private school enrollment rose from 9 to 11 percent of children, with almost half of the rise attributed to reform.

Another response, notes Jon Sonstelie of the University of California, is the emergence of nonprofit foundations to channel parents' contributions into public schools. Over 500 foundations now exist in California, contributing an average $19 per student. In wealthy districts, parents donate an average $148, but that falls short of the roughly $2,000 of per-pupil spending reductions implied by the cap.

Reaction by California's elite, it seems, has been muted. Thus even when upper-end achievement suffers, the most equality-focused policies may be sustainable.

-- John Campbell