Love this thread of pure speculation about the impact of economic forces from a bunch of law students and lawyers with (presumably) little to no relevant background. Allow me to contribute my (also baseless) speculation.
The notion that law firms will increase associate compensation in response to reduced quality of law school applicants misses the point. Law firms won't increase compensation. "Law firms" isn't a single entity or a group acting in concert. A law firm might, however, increase compensation. And I don't think it's reasonable to attribute such an increase to that single law firm's motivation to improve the aggregate incoming talent. That single law firm will increase compensation in an effort to improve its incoming talent. The more the aggregate pool of available talent diminishes, the more incentive a law firm has to become more competitive for the available top talent. And in response, other top law firms--who can afford to do so--will match. If aggregate talent has any impact on salary, it will have an impact in this way.
Often people express the notion that "law isn't rocket science," so talent doesn't matter. I think this is misguided. A person falls somewhere on a spectrum of success-oriented skills--reasoning, diligence, motivation, etc. I don't think you should deduce that "law is easy" merely because law seems easy to you and those you know. More likely, and I don't mean any disrespect by this, those who express this notion probably grew up surrounded by relative privilege and success and don't realize where the majority of Americans fall on the spectrum of success-oriented skills. As a first generation college graduate, and someone who grew up in a city where <20% of people hold college degrees, I can tell you that most of the people I grew up around would not find the law easy. And just for the record, rocket science isn't the idiomatic "rocket science," either. It's merely other stuff smart people sit down and learn.
Finally, I think it's worth pointing out that the pressure on associate compensation also comes from attrition to in-house. In-house compensation has seen steady growth since the recession, shrinking the wage gap. At the same time, many in-house departments are growing, so there is more opportunity.
In my opinion, associate compensation will rise. It's just a matter of how soon, and which firms will be able to afford to match the first-movers.