Legal services sector forecasts - 2017-2025 August 2018 - The Law Society
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www.lawsociety.org.uk Legal services sector forecasts 2017-2025 August 2018
Legal services sector forecasts 2017-2025 2 The Law Society of England and Wales
August 2018
CONTENTS
SUMMARY OF FORECASTS 4
DETAILS OF FORECASTS 6
Total turnover of the legal services sector 6
Housing transactions 11
Net exports of legal services 12
Employment in the legal services sector 14
Prices of legal services 18
Effects of alternative Brexit outcomes on our forecasts 19
APPENDIX A: TABLES OF FORECAST FIGURES 24
APPENDIX B: FURTHER DETAILS OF THE LEGAL SERVICES SECTOR MODEL 28
REFERENCES/LINKS 34
CONTACT DETAILS FOR FURTHER INFORMATION 35
www.lawsociety.org.uk 3Legal services sector forecasts 2017-2025
SUMMARY OF FORECASTS
UK legal services sector 2014 2015 2016 2017 2018 2019 2020 2021
Real turnover £27.94bn £28.10bn £28.06bn £28.50bn £29.10bn £29.77bn £30.53bn £31.04bn
(£bn constant 2010 prices)
% change -2.2% 0.6% -0.1% 1.6% 2.1% 2.3% 2.6% 1.7%
Real net exports £3.47bn £3.86bn £3.42bn £3.72bn £4.14bn £4.37bn £4.64bn £4.82bn
(£bn constant 2010 prices)
% change 9.8% 11.3% -11.4% 8.6% 11.5% 5.6% 6.2% 3.9%
Total employment (number) 326,000 323,000 329,105 320,672 315,390 314,047 314,220 314,094
% change 3.8% -0.9% 1.9% -2.6% -1.6% -0.4% 0.1% 0.0%
Total employment 294,500 293,000 295,605 290,195 286,531 285,865 286,241 286,103
(full-time equivalents)
% change 1.9% -0.5% 0.9% -1.8% -1.3% -0.2% 0.1% 0.0%
Housing transactions 944,827 939,500 936,022 893,832 862,228 840,000 826,276 786,232
(E&W)
% change 18.6% -0.6% -0.4% -4.5% -3.5% -2.6% -1.6% -4.8%
Source: Law Society Research Unit (16 May 2018)
• The Law Society’s estimates of the growth in exports of legal services, and also the slowdown
real turnover (the measure of the volume of in the housing market affecting conveyancing
work done by the legal sector) for 2017 to 2020 work. Real turnover growth in the sector will
remain relatively buoyant. This is due to increasing still be higher than growth in the economy as a
amounts of work relating to regulatory changes whole, with continuing work relating to regulatory
arising from Brexit, the relative buoyancy of work changes after Brexit being a significant factor, but
for law firms from UK businesses in 2016/17, and overall growth in the sector will be significantly
increased work for non-UK clients following the lower than rates seen in the past.
depreciation of the pound’s exchange rate.
• Housing transactions have been slowing down
• However, in the medium-term we expect real significantly since the beginning of 2018, as there
turnover growth to slow down, due to weaker has been little or no increase in people’s real
performance of the UK economy, slower growth in incomes, and while the rate of increase in house
4 The Law Society of England and WalesAugust 2018
prices has fallen in most parts of the UK, prices are short-term. In our headline forecasts that assume
still high relative to average incomes. With slower a soft Brexit, we expect real turnover growth to be
growth in the UK economy and still little sign of 2.2% per year on average over the period 2019-
significant pay increases, we therefore expect 2025. But if the final outcome is a harder Brexit
housing transactions to slow down in the short- such as a Canada-type free trade agreement, then
term and remain depressed over the medium-term. growth over this period could average 1.5% per
year. A hard Brexit could have significant effects
• Net exports of legal services (mainly work on employment in the sector, due to lower growth
undertaken in the UK by UK-based law firms for and also due to less investment in UK firms leading
non-UK clients) have increased significantly in the to lower productivity growth in the sector.
short-term. However, the benefits of the pound
exchange rate’s depreciation have now largely
come through, and with only modest further
falls in the exchange rate expected we do not
anticipate further significant boosts to UK exports
of legal services from this source. Exports of legal
services have also benefited from the pick up in
World economic growth. This will continue to some
extent in the short-term, but in the medium-to-
long term the IMF expects World economic growth
to moderate.
• Our headline forecasts assume that there will
eventually be a relatively soft Brexit. However,
lower overall economic growth, even in the soft
Brexit scenario, means that employment in
the legal services sector is unlikely to show any
significant increases (despite some additional
work for the sector due to Brexit). We expect
total employment in the sector to fall from
an estimated 323,000 jobs (293,000 full-time
equivalent jobs) in 2015, to 311,000 jobs (283,000
full-time equivalent jobs) by 2025. Also, over the
longer term we continue to expect growth in
total employment in the sector to be affected by
the increasing adoption of new technology and
new working methods. This means that by 2038,
employment in the sector could be 20% less than
it would otherwise have been.
• Brexit will have a significant negative effect on
the sector in the longer term, even though the
sector is benefiting from extra legal work in the
www.lawsociety.org.uk 5Legal services sector forecasts 2017-2025
DETAILS OF FORECASTS
The 2018 Law Society Research Total turnover of the legal services
Unit forecasts for the UK legal sector
services are based on May 2018 Growth in the volume of work undertaken by the
National Institute of Economic legal services sector is expected to pick up slightly in
2018 to 2.1% in real terms (ie inflation adjusted) and
and Social Research (NIESR) show further modest increases over the next three
macroeconomic forecasts for the years (2.3% in 2019 and 2.6% in 2020). However,
over the longer term, growth is expected to remain
UK and April 2018 IMF forecasts subdued compared to growth rates seen in the past
for World economic demand. (see Graph 1, page 7).
These macroeconomic forecasts The recent increase in growth and the somewhat
have been fed into the Law higher growth over the next two years is mainly
due to an increase in demand for legal services
Society Research Unit’s forecasting from businesses, and an increase in exports of
model to produce our forecasts for legal services (ie work done by UK-based offices of
law firms for non-UK based clients) as the £ has
turnover, net exports, employment depreciated and World economic activity has picked
and prices in the sector, and our up. Turnover will also continue to be boosted by
forecasts for housing transactions. additional regulatory work (for example work to re-
write contracts arising from the UK leaving the EU).
Further details of this model are in
Appendix B. However, growth in demand for legal services from
individual consumers is likely to have remained slow
The forecasts here are for the UK legal services sector over the past year and is unlikely to show substantial
as a whole (ie combined turnover, net exports and pick up over the next three years. Total real (ie
employment of solicitor firms, barrister firms, and inflation adjusted) turnover of the UK services sector
other legal services providers) and include estimates (a proxy for consumer demand) is currently expected
for recent years (2017 and 2018) where official data to increase by 2.1% in 2018, 2.3% in 2019, and
for those years is not yet available. 2.6% in 2020, following an estimated 1.6% increase
in 2017.
The NIESR macroeconomic forecasts are based on
a relatively soft Brexit outcome. However, given the In the medium-to-longer term, continuing
uncertainty around the final Brexit outcome, we have uncertainty about Brexit, and low UK economic
also looked at the implications for our forecasts of growth, mean that demand for legal services from
two harder Brexit outcomes (see pages 19-23). both business and individual consumers is likely to
show only moderate growth. Expansion of the legal
services sector is likely to continue to be greater than
in the economy as a whole but is expected to be
below past rates. We currently expect growth in real
turnover of the sector to average 2.1% per year over
the period 2021-2025, compared to 4.6% per year
over the pre-financial crisis period 2001-2007.
6 The Law Society of England and WalesAugust 2018
Graph 1: UK legal services sector – real turnover forecasts (% change per year)
%
9
8
7
6
5
4
3
2
1
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
-1
-2
-3
-4
-5
-6
-7
Data Forecasts
Source: Law Society Research Unit (16 May 2018)
Over half of the work undertaken by law firms is for More details of factors determining the two main
business (B2B work), and most of the rest is work for elements of demand are contained in Appendix B of
individual consumers (B2C work), including work paid this report.
for by Legal Aid but undertaken for consumers.
www.lawsociety.org.uk 7Legal services sector forecasts 2017-2025
Business demand Demand for legal services from business will also be
affected in the short-term by the need for additional
The main factor in our forecasting model measuring regulatory work related to Brexit. Our assumptions
the demand for legal services from business (B2B on this additional work are shown in Graph 2. We
work) is the gross trading profits of non-financial have assumed that additional work from Brexit will
companies in the UK. In real terms these profits steadily increase up to 2019 when the UK formally
are estimated to have increased by 6% in 2017, leaves the EU, and then continue to increase in the
reflecting the relative buoyancy of the UK economy transition period that is likely to occur in a soft Brexit
in 2016 and 2017, and the sharp depreciation of the scenario. Additional Brexit-related work then steadily
£ exchange rate after the EU referendum increasing declines in the following years from 2023. Under
export earnings. these assumptions, the total value of additional
Brexit-related work that needs to be undertaken by
The UK economy grew by an estimated 1.9% in 2016 the legal sector is approximately £270m per year on
and 1.8% in 2017, mainly as consumers maintained average over the period 2017-2025.
their spending through increased borrowing and
by running down their savings. Also, the £ effective
(trade-weighted) exchange rate fell by 10% in 2016
and 6% in 2017. This increased export earnings of UK
companies in £ terms, and has led to an increase in
the volume of exports in certain sectors as UK goods
became more price competitive in non-UK markets.
However, the expected slowdown in the economy
over the next year, and a slower depreciation of the
exchange rate, mean that real gross trading profits
of non-financial business are expected to increase
by 1.5% in 2018, 1.3% in 2019, and by 1.2% per year
over the period 2020-2025.
The financial sector is an important source of
demand for legal services. However, the UK financial
sector has shown only a modest recovery since the
financial crisis and, given the likely effects of Brexit
on the sector, it is expected to show only moderate
growth at most over the forecast period. We therefore
do not expect the sector to be a significant source of
growth in the demand for legal services.
8 The Law Society of England and WalesAugust 2018
Graph 2: Assumptions on increase in regulatory work, contract work etc. due to Brexit
Increase in turnover (£m)
£450m
£400m
£350m
£300m
£250m
£200m
£150m
£100m
£50m
£0m
2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: Law Society Research Unit (16 May 2018)
Consumer demand Growth in total real household disposable income
has also been revised down in NIESR’s medium-to-
Growth in demand for legal services from individual longer term forecasts. Low growth in households’
consumers (B2C work) is likely to have remained slow real incomes is therefore expected to be a major
over the past year and is unlikely to show substantial constraining factor on demand for legal services from
improvement over the next two years. The limited rise individual consumers.
in B2C work reflects low income growth of households
and falling housing transactions. In the medium-to- Unemployment is expected to increase slightly over
longer term, only moderate growth in real incomes of the forecast period, from 4.1% in 2018 to 4.9% in
households is expected and housing transactions are 2025, and this would be expected to lead to some
expected to remain depressed. As a result, we also increase in legal work related to social welfare issues.
expect only moderate growth in demand for legal But any increase in this work is likely to be small
services from individual consumers in the medium-to- compared to overall turnover of law firms and will
longer term. only marginally offset the effects of low growth in
households’ real incomes.
Since our last forecasts (released October 2017),
NIESR has revised down its forecasts of growth in
real incomes of individuals. Their May 2018 forecasts
expect total real household disposable income to
increase by 1.5% in 2018 (compared to 2.3% in their
August 2017 forecasts) and increase by 1.8% in 2019
(compared to 2.7% in their August 2017 forecasts).
www.lawsociety.org.uk 9Legal services sector forecasts 2017-2025
Technical note on ONS turnover measures underpinning Law Society
forecasts
The UK Office for National Statistics (ONS) publishes two measures of total turnover in the
legal services sector: Annual Business Survey (ABS) figures and Index of Services (IoS) figures.
Our forecasts are based on the ABS figures, as they are more robust given that they are derived
from a large annual survey, whereas the IoS figures are derived from a smaller monthly survey.
However, the IoS figures do have the advantage that they give an early indicator of changes
in turnover. The latest IoS figures suggest that real turnover in the legal services sector did pick
up in 2017 (see graph below), and particularly towards the end of the year. We suspect that a
proportion of this pick up is due to additional regulatory work (contract work etc. arising from
Brexit) as the economic fundamentals do not suggest a pick up in real turnover quite this large.
ONS Annual Business Survey (ABS) figures vs ONS Index of Services (IoS) figures
Legal services sector real turnover (% change per year)
%
12
10
8
6
4
2
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
-2
-4
-6
-8
-10 ABS data
IoS data
-12 Law Society Research Unit forecasts
Source: Law Society Research Unit (16 May 2018)
10 The Law Society of England and WalesAugust 2018
Housing transactions The relatively low growth in households’ real incomes
continuing will also mean that house prices are
Some growth in households’ incomes and slower unlikely to show much growth in the medium-term.
increases in house prices, will lead to some The February 2018 NIESR forecasts are for the rate
improvement in people’s ability to purchase homes, of increase in prices to be no more than 1% per year
but not enough to prevent the number of housing over the period 2020-2022. However, average UK
transactions falling further in the short-term and house prices are not expected to fall significantly
remaining depressed for at least the medium-term. in absolute terms (although prices have fallen in
The total number of housing transactions in England certain areas of the UK, notably London), due to the
and Wales fell by an estimated 4.5% in 2017, and continuing lack of supply of housing in many regions.
we expect them to fall by a further 3.5% in 2018 and House prices are only likely to fall substantially if UK
2.6% in 2019. As a result, the number of transactions economic growth slows significantly more than is
in England and Wales is likely to fall to 840,000 in currently expected.
2019, compared to a recent high of 945,000 in 2014.
We currently only expect the number of transactions Nevertheless, as a result of some growth in
to begin slowly increasing again from 2023 (see households’ incomes, the ratio of house prices to
Graph 3). incomes is expected to fall from an estimated 4.54
in 2017 to 4.43 in 2018 and 4.34 in 2019. However,
Average UK housing prices increased by 4.6% in given improvement in the affordability of housing is
2017, compared to 7.0% in 2016, based on the only modest, the house price to income ratio would
latest ONS figures. Furthermore, the February 2018 only then be back to its pre-financial crisis level and
NIESR macroeconomic forecasts are for the rate of still significantly higher than the ratios of between
increase in prices to fall to 2.0% in 2018 and 1.2% in 2.30 and 3.20 seen in the 1990s. Also, interest rates
20191. The UK housing market is therefore weakening are expected to gradually increase over the medium-
significantly. This is confirmed by Halifax house term, and this will at least partially offset any modest
price index figures, which shows that the annual improvement in the affordability of housing. We
percentage change in prices had fallen to 2.2% in continue to anticipate the Government’s Help to
April 2018 from 3.8% in April 2017. NIESR attributes Buy Equity Loans scheme will end in 2020, and this
some of the slowdown in the rate of increase in is expected to contribute to a further decline in
prices to tax changes, such as additional Stamp transactions, particularly in 2021.
Duty Land Tax on second homes and reduced tax
allowances for buy-to-let purchases, and in London
to uncertainty generated by Brexit. But the main
factor behind the slowdown in the rate of increase
in prices is undoubtedly lower growth in households’
real incomes.
1 We have used the February 2018 NIESR house price forecasts, as we have some concerns about the May 2018 forecasts.
www.lawsociety.org.uk 11Legal services sector forecasts 2017-2025
Graph 3: Housing transactions – number of transactions (England & Wales)
Affordability
1,400,000 6
1,200,000
5
1,000,000
4
800,000
3
600,000
2
400,000
1
200,000
0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Data
Forecasts
Affordability (house prices relative to incomes)
Source: Law Society Research Unit (16 May 2018)
Net exports of legal services of legal services by UK-based law firms increased by
9% in 2017 and will rise by a further 12% in 2018.
Net exports of legal services is work undertaken by The UK legal services sector has performed very
the UK offices of law firms for clients based outside of well over the longer run in terms of exports, but the
the UK, minus the small amount of work undertaken recent large increases in exports are not expected to
by non-UK offices of law firms for clients based in the continue as the effects of the depreciation of the £
UK. The majority of legal services exports (over 95%) diminish and World economic growth begins to slow
is undertaken by firms of solicitors, and mainly larger down. In the medium-to-longer term, export volumes
City firms for business clients. are expected to increase by 5-6% per year – below
the long-term trend – but still making a significant
The volume of net exports of legal services is contribution to the UK balance of payments.
estimated to have increased significantly in 2017
and is expected to show further significant growth
in 2018, due to the depreciation of the £ exchange
rate and the pick up in World economic activity. Our
current estimate is that the volume of net exports
12 The Law Society of England and WalesAugust 2018
Graph 4: UK legal services sector – real net exports (exports minus imports) forecasts
(% change per year)
%
35
30
25
20
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
-5
-10
-15
Data Forecasts
Source: Law Society Research Unit (16 May 2018)
The £ depreciated sharply following the UK’s from non-UK offices to UK offices, and firms can
referendum on EU membership, falling against often transfer work within a few months. This is in
the euro from €1.38/£ in 2015 to €1.14/£ in 2017, contrast to sectors such as manufacturing which use
and against the US dollar from US$1.53/£ in 2015 a substantial amount of plant and machinery, and
to US$1.29/£ in 2017. This is likely to have had a may well need up to a few years to move production.
significant short-term effect on where law firms A caveat concerning the amount of work that law
choose to undertake internationally mobile work, as firms may have transferred to UK offices is, however,
it means that UK-based offices have cost advantages that the recent depreciation of the £ is due to fears
in international markets (ie a depreciation of the £ that the UK will lose access to important EU markets
means that costs of undertaking work in the UK is following Brexit. As a result, we have not incorporated
cheaper in terms of US$ or euros). in our forecasts as large an increase in UK exports
as we might have normally seen with such a sharp
Also, because legal services work is relatively labour depreciation of the £.
intensive, work can more easily be transferred
www.lawsociety.org.uk 13Legal services sector forecasts 2017-2025
Although the depreciation of the £ is the main full-time equivalent jobs), but then to increase
factor behind the recent increase in volume of net marginally over the period 2021-2022 to 315,000
exports of legal services (even bearing in mind jobs (287,000 full-time equivalent jobs – see Graphs
the circumstances of the depreciation), World 4 and 6).
economic activity has also picked up and, in the
short-to-medium term, is likely to benefit law firms However, in the longer term, modest growth in
undertaking work for non-UK clients. The latest IMF the UK economy and the increasing use of labour-
figures estimate that GDP growth in the advanced saving technology and new working methods in the
economies increased from 1.7% in 2016 to 2.3% sector, mean that total employment in the sector is
in 2017, and is expected to rise to 2.5% in 2018. unlikely to grow at the rates we have seen in the past.
We estimate that almost all the increase in UK Furthermore, over a 20-year time horizon the number
legal services exports in 2017 was attributable to of jobs in the sector is likely to gradually decline.
the depreciation of the £ but, conversely, in 2018, Total employment in the sector could fall to 311,000
approximately three-quarters of the expected jobs in 2025 (283,000 full-time equivalent jobs) and
increase in exports is likely to be due to the pick up 294,000 by 2038 (268,000 full-time equivalent jobs).
in World economic activity2. However, the IMF does
Our expectation for the increasing adoption of
not expect growth in the advanced economies to be
new technology and new working methods in the
sustained at the 2018 rate, slowing gradually to 1.5%
sector to result in jobs being replaced is reflected
by 2023.
in productivity forecasts. We have assumed that
Economic activity in the advanced economies is more in the long run, productivity growth in the sector
important for UK legal services exports than activity increases to approximately 2.7% per year, from a
in emerging economies, but growth in the emerging rate of approximately 1.3% per year seen in the
economies will still have some positive effects on past (see Graph 7). On this basis we have estimated
those exports. The latest IMF figures estimate that that by 2038, the total number of jobs in the UK
GDP growth in emerging economies increased from legal services sector will be approximately 20% less
4.4% in 2016 to 4.8% in 2017 and is expected to than it would otherwise have been, as a result of
reach 5.1% by 2019. the adoption of new technology. This corresponds
to between 70,000-80,000 fewer jobs in total (or
between 60,000-70,000 full-time equivalent jobs)
Employment in the legal services than there would otherwise have been (see Graph 8
and also our October 2017 forecasts report http://
sector
www.lawsociety.org.uk/support-services/research-
Total employment in the UK legal services sector fell trends/legal-services-sector-forecasts/).
in 2015, and we expect further falls in the short-term
due to below average real turnover growth in the
sector. However, total employment could increase in
2020-2022 due to the continuing need for additional
regulatory work arising from Brexit. We currently
expect total employment in the sector to fall from
323,000 jobs in 2015 (equal to 293,000 full-time
equivalent jobs), to 314,000 jobs in 2019 (286,000
2 We estimate that if the £ had remained at its 2015 value against the US$ and the euro, then UK exports of legal services would have only increased by 1% in
2017 (compared to 9% with the actual depreciation that occurred). However, for 2018, our forecast for the increase in exports would have still been for 9% growth
(compared to 12% with the actual depreciation that occurred), even if the £ had remained at its 2015 value.
14 The Law Society of England and WalesAugust 2018
Graph 5: UK legal services sector – forecasts of total employment (% change per year)
%
10
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
7 2018
8 2019
9 2020 2021 2022 2023
3 2024 2025
5
-2
-4
-6
Data Forecasts
Source: Law Society Research Unit (16 May 2018)
www.lawsociety.org.uk 15Legal services sector forecasts 2017-2025
Graph 6: UK legal services sector – employment forecasts (000s)
000s
400
350
300
250
200
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Total employment (number)
Total employment (full-time equivalents)
Full-time employees employed
Part-time employees employed
Other employment (partners, directors, owners, and self-employed)
Source: Law Society Research Unit (16 May 2018)
This does not mean that the actual number of jobs of new technology and resulting reductions in unit
will fall by this amount, as a significant proportion labour costs of providing services (lowering prices of
of the jobs lost as a result of the adoption of new services to consumers), will also have an offsetting
technology will be offset by continuing growth in the effect. These offsetting factors will help to mitigate
demand for legal services (albeit that the growth in job losses from new technology and new working
demand will be lower than it has been in the past). methods to an extent.
Also, the increases in productivity from the adoption
16 The Law Society of England and WalesAugust 2018
Graph 7: Underlying trend productivity (Index 1990=1)
80
70 Transition period
2017-2026
60
50
40
30
20
10
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
Forecasts without increase in underlying trend productivity growth
Forecasts with increase in underlying trend productivity growth
Source: Law Society Research Unit (31 May 2018)
Graph 8: Total legal services sector – employment (000s full-time equivalents)
350
300
250
200
150
100
50
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
-50
-100
Forecasts without increase in underlying trend productivity growth
Forecasts with increase in underlying trend productivity growth
Amount employment lower than it would otherwise have been
Source: Law Society Research Unit (31 May 2018)
www.lawsociety.org.uk 17Legal services sector forecasts 2017-2025
Prices of legal services The rate of increase in prices of legal services is
expected to remain relatively low over the forecast
The forecasts also incorporate the effects of changes period, and remain at or below the general rate of
in the prices of legal services. Firms supplying legal inflation in the economy. The limited price growth
services appear to mostly set prices as a mark-up reflects more moderate growth in the demand
on costs (mainly unit labour costs3) and relative for legal services, and in the longer term is due to
to the general level of inflation in the economy as reductions in the cost of providing services from the
a whole. Prices are also adjusted slightly upwards adoption of new technology. Price increases could
or downwards according to whether demand was rise slightly in 2020/2021 due to increasing unit
previously above or below average, although these labour costs as firms have to take on more staff to
‘pressure of demand’ effects on firms do seem to be meet additional demand for legal services arising
relatively small in the legal services sector. Generally, from Brexit. But our central forecasts do not show any
price effects on the demand for legal services are sharp increase in prices (see Graph 9).
relatively small, as the demand for legal services
is mainly a ‘derived demand’ (ie legal services are Our medium-to-longer term forecasts for legal
purchased as part of another process, be it for services prices continue to assume price increases
example, a business merger or a consumer issue such will be moderated by increasing competition and
as divorce or buying a house). de-regulation in the market. Increasing competition
in the market is also likely to raise the importance
of prices to consumers of legal services. There is
evidence that consumers have become more
Graph 9: UK legal services sector – prices relative to unit labour costs (% change per year)
10
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
-2
-4
Prices (data)
Prices (forecasts)
ULC (data)
ULC (forecasts)
Source: Law Society Research Unit (16 May 2018)
3 Unit labour costs are defined as total employment costs divided by the total volume of turnover. They can therefore be thought of as ‘total staff costs per hour of
work undertaken’.
18 The Law Society of England and WalesAugust 2018
sensitive to price changes over the past three to four c) no significant decrease in productivity growth
years (approximately the period since LASPO), and in the UK as a result of Brexit (although NIESR
we continue to assume that consumers will become acknowledges that in the longer term productivity
more sensitive to prices over the forecast period. growth could be affected)
d) (in line with the Office for Budget Responsibility’s
Effects of alternative Brexit assumptions) that the UK continues to make
contributions to the EU budget as if it were a full
outcomes on our forecasts
member of the EU.
Our main forecasts for the UK legal services sector
The two alternative hard Brexit macroeconomic
are based on NIESR macroeconomic forecasts for
scenarios we have looked at are those recently
the UK economy, which assume that the eventual
produced by Oxford Economics for Thomson Reuters4:
outcome of the UK’s negotiations to leave the EU will
be a relatively soft Brexit. There is however (as NIESR
• a scenario in which the UK adopts a Canada-type
also acknowledges) significant uncertainty around
free-trade agreement (FTA) with the EU
this assumption about Brexit. The Law Society
Research Unit has therefore looked at the effects of • a scenario in which the UK fails to reach a final
two alternative hard Brexit outcomes on our forecasts deal with the EU (a ‘no deal’ scenario) and falls
for the UK legal services sector. back on World Trade Organisation (WTO) rules for
international trade.
The NIESR Brexit assumptions are based on the
Phase 1 draft legal agreement published by the EU These macroeconomic scenarios have been fed into
and UK negotiators in March 2018. On this basis, the Law Society Research Unit’s model for the UK
NIESR assumes that a soft Brexit will entail: legal services sector to produce alternative forecasts
for the sector.
a) ‘the UK maintains a close but not frictionless
trading relationship with the EU’ Graph 10 shows our forecasts for real turnover in the
UK legal services sector under the:
b) a transition period of 21 months after the UK
leaves the EU in March 2019 1) NIESR soft Brexit macroeconomic scenario (our
main forecasts for the sector)
2) Oxford Economics FTA scenario
3) Oxford Economics WTO scenario
4 More details of the Oxford Economics FTA and WTO macroeconomic scenarios are contained in their forthcoming report for Thomson Reuters ‘The Outlook for
the UK’s Legal Services Sector – Helping to understand the implications of Brexit’. This report includes an assessment by Oxford Economics of the effects of their
Brexit scenarios on the sector, results from an online survey on the potential effects of Brexit, and results from face-to-face interviews with a number of firms on
the potential effects. The Law Society Research Unit and the Law Society Relationship Management Team have provided advice and assistance in producing the
Thomson Reuters report, although Thomson Reuters and Oxford Economics are responsible for the final report. We have used the FTA and WTO macroeconomic
scenarios from the report with permission of Thomson Reuters/Oxford Economics.
www.lawsociety.org.uk 19Legal services sector forecasts 2017-2025
Graph 10: UK legal services sector – effects of different Brexit scenarios
Forecasts of real turnover (% change per year)
%
3
2.5
2
1.5
1
0.5
0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
-0.5
-1
-1.5
-2
-2.5
-3
Law Society Research Unit model used
Macroeconomic forecasts fed into model:
NIESR soft Brexit scenario
Oxford Economics FTA scenario
Oxford Economics WTO scenario
ONS data
Source: Law Society Research Unit (20 June 2018)
Under the WTO scenario, growth is particularly and WTO scenarios is lower than in the soft Brexit
affected by the likelihood of shock downward scenario despite those hard scenarios assuming more
reduction in the UK’s exports from 2019 and, in regulatory and contract related work arising from
this scenario, on average, real turnover in the legal Brexit. This additional work is also responsible for the
services sector increases by only 1.1% per year marginally higher growth rate in 2018 under the FTA
over the period 2018-2025. Growth under the FTA and WTO scenarios.
20 The Law Society of England and WalesAugust 2018
The forecasts for employment in the sector in the two Graph 11 shows how much total employment in the
hard Brexit scenarios are somewhat more uncertain, sector would be lower in the two hard Brexit scenarios
as the effects on employment are dependent on how compared to what it would be in the soft Brexit
a hard Brexit affects (underlying) productivity growth scenario – assuming that the hard Brexit scenarios
in the UK legal services sector5. have no effect on productivity growth. Under these
assumptions, total employment is substantially lower
The Oxford Economics FTA and WTO scenarios in the two hard Brexit scenarios compared to the
assume that a hard Brexit has no effect on NIESR soft Brexit scenario.
productivity growth in the sector.
Graph 11: UK legal services sector – effects of different Brexit scenarios – no decrease in
productivity growth in FTA and WTO scenarios
Decrease in total employment (number of full-time equivalent jobs) compared to NIESR soft
Brexit scenario
4,000
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
0
-4,000
-8,000
-12,000
-16,000
-20,000
-24,000
Law Society Research Unit model used
Macroeconomic forecasts fed into model:
Oxford Economics FTA scenario
Oxford Economics WTO scenario
Source: Law Society Research Unit (20 June 2018)
5 Productivity growth does also have an effect on demand for legal services (real turnover) in our model, through its effects on unit costs and prices. However, price
effects in the legal services market are relatively weak, and therefore demand for legal services is not affected significantly.
www.lawsociety.org.uk 21Legal services sector forecasts 2017-2025
However, there is a significant risk over the longer If a hard Brexit has a significant effect on
term that less investment, less competition with non- productivity growth, by 2025 total employment in
UK firms, and less access to skilled staff from other the sector (in terms of number of full-time equivalent
EU countries, could lead to lower productivity growth. jobs) is 4,000 (1.5%) less than in the soft Brexit
This would mean that, although real turnover growth scenario (based on the FTA case). But if there is
would be lower in the two hard Brexit scenarios, a ‘no-deal’ Brexit followed by WTO rules, the total
firms would no longer be benefiting as much from employment is 10,000 (3.5%) less than in the soft
productivity increases. The difference in employment Brexit scenario in 2025.
between the two hard Brexit scenarios and the soft
Brexit scenario would be smaller as a result. However, this does not mean that lower productivity
growth is beneficial for the sector, as it will have other
Graph 12 shows, compared with the soft Brexit significant negative repercussions on firms. Lower
scenario, how much lower total employment in the productivity growth will mean that unit costs will
sector would be in the two hard Brexit scenarios, rise faster and, although some of these higher costs
assuming reduced productivity growth. It is assumed will be passed on in terms of higher charges, profit
that in the WTO scenario, productivity growth margins and amounts available for salary increases
reduces more than in the FTA scenario6. Under these are likely to be significantly lower. Also, in the longer
assumptions, total employment is still significantly term, higher costs are likely to affect the international
lower in the two hard Brexit scenarios compared to competitiveness of UK-based law firms.
the NIESR soft Brexit scenario, but by somewhat
less than in the ‘no effects on productivity growth’
situation.
6 In our central soft Brexit scenario we assume that in the long run, productivity growth in the sector increases to approximately 2.7% per year as a result of new
investment, from its previous rate of approximately 1.3% per year. In the simulations where a hard Brexit has a significant effect on productivity growth, in the FTA
scenario we assume it increases to only 2.0% per year in the long run, and in the WTO scenario we assume it increases to only 1.7% per year in long run.
22 The Law Society of England and WalesAugust 2018
Graph 12: UK legal services sector – effects of different Brexit scenarios – with decrease in
productivity growth in FTA and WTO scenarios
Decrease in total employment (number of full-time equivalent jobs) compared to NIESR soft
Brexit scenario
4,000
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
0
-4,000
-8,000
-12,000
-16,000
-20,000
-24,000
Law Society Research Unit model used
Macroeconomic forecasts fed into model:
Oxford Economics FTA scenario
Oxford Economics WTO scenario
Source: Law Society Research Unit (20 June 2018)
www.lawsociety.org.uk 23Legal services sector forecasts 2017-2025
APPENDIX A:
TABLES OF FORECAST FIGURES
UK legal services sector – real turnover UK legal services sector – housing transactions
forecasts forecasts
Years £m constant % change Years Number % change
2010 prices per year per year
2000 20575 3.8 2000 1111404 -5.6
2001 22224 8.0 2001 1226922 10.4
2002 22561 1.5 2002 1329753 8.4
2003 23247 3.0 2003 1236738 -7.0
2004 24030 3.4 2004 1249639 1.0
2005 24845 3.4 2005 1044991 -16.4
2006 26418 6.3 2006 1308139 25.2
2007 28250 6.9 2007 1255348 -4.0
2008 26393 -6.6 2008 638164 -49.2
2009 25108 -4.9 2009 617370 -3.3
2010 25463 1.4 2010 656975 6.4
2011 26701 4.9 2011 655612 -0.2
2012 26850 0.6 2012 664916 1.4
2013 28582 6.5 2013 796679 19.8
2014 27940 -2.2 2014 944827 18.6
2015 28098 0.6 2015 939500 -0.6
2016 28063 -0.1 2016 936022 -0.4
2017 28502 1.6 2017 893832 -4.5
2018 29098 2.1 2018 862228 -3.5
2019 29770 2.3 2019 840000 -2.6
2020 30530 2.6 2020 826276 -1.6
2021 31040 1.7 2021 786232 -4.8
2022 31777 2.4 2022 784352 -0.2
2023 32460 2.1 2023 789245 0.6
2024 33128 2.1 2024 793828 0.6
2025 33826 2.1 2025 798118 0.5
5-year periods Average Average % 5-year periods Average Average %
per year over change per year per year over change per year
period over period period over period
1996-2000 18655 5.5 1996-2000 1070544 7.2
2001-2005 23381 3.8 2001-2005 1217609 -1.2
2006-2010 26326 0.5 2006-2010 895199 -8.9
2011-2015 27634 2.0 2011-2015 800307 7.4
2016-2020 29193 1.7 2016-2020 871672 -2.5
2021-2025 32446 2.1 2021-2025 790355 -0.7
2026-2030 36164 2.3 2026-2030 809155 0.4
2031-2035 40577 2.4 2031-2035 823523 0.3
Source: Law Society Research Unit (16 May 2018)
24 The Law Society of England and WalesAugust 2018
UK legal services sector – real net exports UK legal services sector – full-time employees
(exports minus imports) forecasts in employment
Years £m constant % change Years 000s % change
2010 prices per year per year
2000 1387 12.4 2000 187 -1.6
2001 1815 30.9 2001 204 9.1
2002 1925 6.0 2002 213 4.4
2003 1915 -0.5 2003 208 -2.3
2004 1870 -2.3 2004 210 1.0
2005 2122 13.5 2005 212 1.0
2006 2448 15.4 2006 217 2.4
2007 2820 15.2 2007 227 4.6
2008 2974 5.5 2008 223 -1.8
2009 2810 -5.5 2009 234 4.9
2010 2926 4.1 2010 218 -6.8
2011 3296 12.7 2011 222 1.8
2012 3006 -8.8 2012 213 -4.1
2013 3162 5.2 2013 219 2.8
2014 3471 9.8 2014 219 0.0
2015 3863 11.3 2015 218 -0.5
2016 3420 -11.4 2016 217 -0.4
2017 3715 8.6 2017 216 -0.4
2018 4142 11.5 2018 215 -0.7
2019 4373 5.6 2019 215 0.1
2020 4643 6.2 2020 216 0.3
2021 4821 3.9 2021 216 0.0
2022 5077 5.3 2022 216 0.3
2023 5338 5.1 2023 216 -0.4
2024 5614 5.2 2024 215 -0.2
2025 5902 5.1 2025 214 -0.4
5-year periods Average Average % 5-year periods Average Average %
per year over change per year per year over change per year
period over period period over period
1996-2000 1213 4.1 1996-2000 #N/A #N/A
2001-2005 1929 8.9 2001-2005 209 2.5
2006-2010 2796 6.6 2006-2010 224 0.6
2011-2015 3360 5.7 2011-2015 218 0.0
2016-2020 4059 3.7 2016-2020 216 -0.2
2021-2025 5351 4.9 2021-2025 215 -0.1
2026-2030 6875 5.1 2026-2030 211 -0.4
2031-2035 8830 5.1 2031-2035 208 -0.3
Source: Law Society Research Unit (16 May 2018)
www.lawsociety.org.uk 25Legal services sector forecasts 2017-2025
UK legal services sector – part-time employees UK legal services sector – other employment
in employment (partners, directors, owners and self-employed)
Years 000s % change Years 000s % change
per year per year
2000 42 -4.5 2000 43 2.4
2001 39 -7.1 2001 41 -4.7
2002 42 7.7 2002 43 4.9
2003 50 19.0 2003 44 2.3
2004 50 0.0 2004 45 2.3
2005 50 0.0 2005 46 2.2
2006 55 10.0 2006 30 -34.8
2007 60 9.1 2007 43 43.3
2008 59 -1.7 2008 41 -4.7
2009 62 5.1 2009 49 19.5
2010 64 3.2 2010 53 8.2
2011 60 -6.3 2011 50 -5.7
2012 53 -11.7 2012 50 0.0
2013 50 -5.7 2013 45 -10.0
2014 63 26.0 2014 44 -2.2
2015 60 -4.8 2015 45 2.3
2016 67 11.7 2016 45 0.0
2017 61 -9.0 2017 44 -3.3
2018 58 -5.3 2018 43 -1.5
2019 56 -2.3 2019 43 -0.5
2020 56 -0.7 2020 42 -0.3
2021 56 0.0 2021 42 -0.3
2022 56 0.5 2022 42 -0.3
2023 56 -0.3 2023 42 -0.9
2024 56 -0.1 2024 42 -0.6
2025 56 -0.3 2025 41 -0.9
5-year periods Average Average % 5-year periods Average Average %
per year over change per year per year over change per year
period over period period over period
1996-2000 #N/A #N/A 1996-2000 #N/A #N/A
2001-2005 46 3.5 2001-2005 44 1.4
2006-2010 60 5.1 2006-2010 43 2.9
2011-2015 57 -1.3 2011-2015 47 -3.2
2016-2020 60 -1.4 2016-2020 43 -1.1
2021-2025 56 0.0 2021-2025 42 -0.6
2026-2030 55 -0.6 2026-2030 40 -1.0
2031-2035 54 -0.4 2031-2035 38 -0.9
Source: Law Society Research Unit (16 May 2018)
26 The Law Society of England and WalesAugust 2018
UK legal services sector – total employment UK legal services sector – total employment
(number) (full-time equivalents)
Years 000s % change Years 000s % change
per year per year
2000 272 -1.4 2000 251 -1.2
2001 284 4.4 2001 265 5.4
2002 298 4.9 2002 277 4.7
2003 302 1.3 2003 277 0.0
2004 305 1.0 2004 280 1.1
2005 308 1.0 2005 283 1.1
2006 302 -1.9 2006 275 -3.0
2007 330 9.3 2007 300 9.3
2008 323 -2.1 2008 294 -2.2
2009 345 6.8 2009 314 7.0
2010 335 -2.9 2010 303 -3.5
2011 332 -0.9 2011 302 -0.3
2012 316 -4.8 2012 290 -4.1
2013 314 -0.6 2013 289 -0.2
2014 326 3.8 2014 295 1.9
2015 323 -0.9 2015 293 -0.5
2016 329 1.9 2016 296 0.9
2017 321 -2.6 2017 290 -1.8
2018 315 -1.6 2018 287 -1.3
2019 314 -0.4 2019 286 -0.2
2020 314 0.1 2020 286 0.1
2021 314 0.0 2021 286 0.0
2022 315 0.2 2022 287 0.2
2023 313 -0.4 2023 285 -0.4
2024 313 -0.2 2024 285 -0.2
2025 311 -0.4 2025 283 -0.4
5-year periods Average Average % 5-year periods Average Average %
per year over change per year per year over change per year
period over period period over period
1996-2000 #N/A #N/A 1996-2000 #N/A #N/A
2001-2005 299 2.5 2001-2005 276 2.4
2006-2010 327 1.7 2006-2010 297 1.4
2011-2015 322 -0.7 2011-2015 294 -0.7
2016-2020 319 -0.5 2016-2020 289 -0.5
2021-2025 313 -0.2 2021-2025 285 -0.2
2026-2030 306 -0.5 2026-2030 279 -0.5
2031-2035 300 -0.4 2031-2035 273 -0.4
Source: Law Society Research Unit (16 May 2018)
www.lawsociety.org.uk 27Legal services sector forecasts 2017-2025
APPENDIX B:
FURTHER DETAILS OF THE LEGAL SERVICES SECTOR MODEL
The model and forecasts are for Government are also used to calculate disposable
income per household to use in the affordability term
the UK legal services sector as a in the housing transactions model. Key assumptions
whole (ie the combined turnover, relating specifically to the legal services sector are
made with respect to the underlying trend rate
exports, employment etc. of of productivity growth, the effects on prices of
solicitor firms, barrister firms, and increasing competition and regulatory changes, and
the effects on real turnover of the expected increase
other legal service providers that in legal work from the process of the UK leaving the
undertake ‘paid for’ legal work, EU.
such as licensed conveyancers, Details of the main components of the model are
patent and copyright agents). given below. The structure of the model is also shown
in the flowchart on pages 32 and 33.
The model structure (ie the estimation of the
relationships in the model) is based on Office for
National Statistics (ONS) Annual Business Survey Real turnover of the legal services
data for the UK legal services sector and ONS data
sector
for the UK economy, over the period 1995-2017. The
relationships (equations) in the model are estimated Real turnover (variable rturn) of firms in the UK legal
using econometric techniques. This has enabled us to services sector (the measure of the ‘volume’ of legal
determine: (a) which factors best explain movements work done by the sector) is broadly determined by
of key variables (real turnover, employment, real net factors relating to the demand for legal work from
exports, and prices) in the legal services sector; (b) the business sector (B2B work) and factors relating
the magnitude of the effects of these factors on the to the demand for legal services from personal
variables; and (c) how quickly the factors affect the consumers (B2C work).
variables.
The two main factors relating to business demand
The methodology also enables us to assess the are the real profits of (non-financial) businesses in
degree of confidence in the estimated relationships the economy (rprof) and output of the UK financial
(ie how closely the estimated relationships accurately sector (yfin). Financial sector output is included
reflect how the market actually works). The scope separately as it is an important source of business for
of the model is constrained slightly by the data the legal sector.
available, but the model does explain at least 90% of
the movements of key variables in the legal services Forecasts of real profits of (non-financial) businesses
sector. in the economy (rprof) are not provided in the NIESR
macroeconomic forecasts using the same definition
The forecasts for the UK legal services sector are as we use in our model. We have therefore included
based on the macroeconomic forecasts for the UK a subsidiary equation which relates real profits to UK
economy produced by the National Institute of GDP at market prices (gdp), and real unit labour costs
Economic and Social Research (NIESR) and forecasts in the economy as a whole (rulcecon) ie unit labour
for world economic demand produced by the IMF. cost (ulcecon) deflated by consumer prices (cpi). The
These macroeconomic forecasts are then fed into results from the equation have also been adjusted
our model to produce forecasts for the sector. slightly for the effects of the post-EU referendum
Projections for the total number of households in the depreciation of the £ on profits of businesses.
UK from the Department for Communities and Local
28 The Law Society of England and WalesAugust 2018
The main factors relating to demand from personal prices of legal services. Forecasts for legal services
consumers are the real (ie inflation-adjusted) prices are also generated by a separate equation in
disposable (ie after tax) income of households model (see page 31).
(rhhdi), the number of housing transactions (htrans),
and the average unemployment rate (ur). Forecasts
for housing transactions are generated by a separate Housing transactions
equation in model (see below). Unemployment
is included in the real turnover part of the model Housing transactions (htrans) are included in
as, under normal circumstances, an increase in the model in more detail as, although residential
unemployment would be expected to lead to some conveyancing work accounts for a relatively small
increase in legal work (eg through increased social proportion of the total value of legal work undertaken
welfare work and also possibly increased criminal (approximately 4-6% of solicitor firms’ total turnover
law work). However, the effects of unemployment is accounted for by residential conveyancing work),
are relatively small compared to the effects of other the magnitude of increases and decreases in housing
factors. transactions that can occur from year to year mean
that they can have a significant effect on the rate of
The real turnover equation also includes an change in total turnover of the legal sector.
adjustment for the expected increase in legal work
from the process of the UK leaving the EU. These The main factor determining the number of housing
adjustments are based on external estimates, transactions each year is the affordability of housing
including results from specific questions on this in our (afford) (ie average house prices relative to average
surveys of solicitor firms. disposable income per household). Affordability is
calculated as average ‘real’ house prices (rhp) divided
Real net exports (inflation adjusted exports minus by average real disposable income per household,
imports) of legal services (rnetexp) and prices of where average real house prices are defined as
legal services (pdlegserv) relative to the general level average £ house prices (hp) divided by consumer
of consumer price inflation (cpi) are also included in prices (cpi), and average real disposable income per
the real turnover model. household is defined as total real disposable income
of households (rhhdi) divided by the total number of
Exports relate to work undertaken in the UK by households in the UK (hh).
UK-based law firms for non-UK clients and are
therefore included in UK legal services sector Average mortgage rates (mortrate) are also included
turnover. Forecasts for real net exports of legal in the housing transactions equation. Changes
services are generated by a separate equation in in mortgage rates mainly only have an effect
model (see page 30). on transactions in the short-to-medium term, as
increases in rates mostly lead people to delay house
Legal services prices do not appear to have a major moves rather than abandon them altogether and,
effect on real turnover, reflecting that most legal similarly, decreases in rates can enable people to
services are a ‘derived demand’ (ie are bought as bring forward moves.
a necessary input into other activities or actions).
However, there is some evidence that users of legal There are also two types of one-off factors included
services have become more price sensitive over the in the transactions equation. Factors are included
past three to four years (approximately the post relating to the Government’s Help to Buy Mortgage
LASPO period) and this change is incorporated in the Guarantee scheme (which ran from 1 April 2013 to
model using a ‘shift’ variable (dlaspo) on the real 31 Dec 2016) (dummy variable dhtbmgs) and its
www.lawsociety.org.uk 29Legal services sector forecasts 2017-2025
Equity Loans scheme (which was introduced on 8 Oct Employment in the legal services
2013 and is expected to finish at the end of 2020)
sector
(dummy variable dhtbels). As these two schemes
have only been in existence since 2013, they appear Employment in the legal services sector is determined
in the model as a single combined weighted average by the level of real turnover in the sector, and in the
variable (dhtbwtdav) as it is difficult to distinguish longer term also by the underlying trend rate of
between their effects over this short time period. productivity growth. Separate models are included
for the number of full-time employees employed in
Special factors are also included to take account of
the sector (eeft), the number of part-time employees
the run-up to the 2007-08 financial crisis (dummy
employed (eept), and for the number of ‘other’ staff
variable d2006) and the actual downturn in 2008
employed (empother) which, in the legal services
(dummy variable d2008). These factors show that
sector, mainly consists of partners, directors, owners
the crisis not only involved a sharp downturn in
and the self-employed.
2008, but also an unusually buoyant market in the
run-up to the crisis in 2006. It is estimated from the The employment equations take into account that
model that the financial crisis was responsible for a change in firms’ turnover does not immediately
approximately a 60% fall in transactions in 2008, lead to a change in employment, as when turnover
but the unusually buoyant market in the run-up to increases, the costs of hiring and training new staff
the crisis was responsible for transactions being and the initial uncertainties about whether an
approximately 29% higher in 2006 than they would increase in turnover will persist, mean that changes
otherwise have been. in turnover may not be fully reflected in employment
until after a year, or possibly two years. Similarly,
when turnover decreases, it may take time to be fully
Real net exports of legal services reflected in employment numbers.
Real net exports of legal services (rnetexp) are Underlying trend productivity growth is estimated
mainly determined by the level of economic activity from a time trend variable (prodtrend), included
in other advanced economies (gdpadv), as these in these equations, and appropriate changes are
economies continue to be the main source of non- made to the time trend for the forecasts to take
UK business for law firms. Real net exports are also into account expected increases in productivity
affected by the level of economic activity in emerging from factors such as increasing automation of legal
economies (gdpemerg), although the effect is less services functions.
than that of the advanced economies, and appears
to be more related to significant changes in the rate Total employment in the sector (emptot) is the
of growth in the emerging economies. sum of full-time employees employed, part-time
employees employed, and ‘other’ staff employed.
Exchange rates effects are also included in the model, The main constituent of total employment in the
and separate variables are included for the US$/£ sector though is the number of full-time employees
exchange rate (xrusdgbp) and the euro/£ exchange employed, accounting for approximately 65%-70% of
rate (xreurgbp). Generally, exports of legal services total employment. Total employment in terms of the
(and other services) are less affected by changes in number of ‘full-time equivalent’ jobs (empfte) is also
exchange rates, compared to, for example, exports calculated, where each full-time job is counted as
of manufactured goods, but the size of the recent one position and each part-time job is counted as a
change in the £ exchange rates does mean that this half position.
has had a significant effect on legal services exports.
30 The Law Society of England and WalesYou can also read
