Tuesday, August 19, 2014

To tip or not to tip, that SHOULD BE the question

Tipped workers are more than twice as likely to be in poverty as the average worker. Yet tipping remains an accepted norm in America because people believe that tips reward hard work. Don't they? 

It turns out that tipping is only weakly correlated with good service. Michael Lynn has shown that it is more strongly associated with social norms and the appearance of the server themselves. White, 30-something, blonde, females receive the highest tips. Black people are less likely to both give and receive tips. So the likelihood of receiving a tip is more or less out of a server's hands, even though servers believe that better service is rewarded with higher tips. 

Tipping can also be confusing and uncomfortable. Tourists in America are often puzzled about how much to tip. Stories are told of patrons being chased out of restaurants by servers who were unsatisfied with their tip, claiming that they needed the money to survive. The obligation falls to the customer to pay the server enough.

Why are tips so important to the server? Because their base wage rate ($2.13 an hour, unchanged for 20 years) is set assuming that tips will be received. In theory, tipped workers should take home a minimum wage ($7.25) because employers are obliged to make up any difference between base wage plus tips and the minimum wage. In practice, the process appears complicated and reliant on employers acting promptly to pay the difference in the two, without error.

Source: Council of Economic Advisers available here.
Occupations shown are predominantly tipped.
But even the minimum wage ($7.25 an hour) is too low to meet a basic standard of living, as previous blogs have argued. So if a server wishes to earn above this level, the only way that they can do so is to earn tips to take their total wages over and above the minimum wage. But tips are irregular and never guaranteed. As a result, the median tipped wage ($10.64) is much lower than the median across all wages ($17.12) (Chart 1, left-hand diamonds). Tipping isn't working as a way to increase income. In poorer areas, where income of the clientele is itself low, tipped workers are even less likely to earn a decent amount.  

In addition, tipped jobs attract more women than men, exposing them to the irregularity of income streams that tipped work brings. Nearly three-quarters of tipped workers are women, even though they account for just under half of total employment (Chart 1, left-hand bars). Women may be attracted to these jobs because they offer flexible hours that allow them to work around childcare. But the low-paid nature of this work makes it more likely that women, particularly single mothers, will find themselves in poverty.

Given how inefficient, confusing and poverty-creating tipping can be, why not eliminate the practice altogether? Some restaurants have already instigated such a practice. Examples include increasing base salaries and making clear that tips are optional, or adding a service charge to all tables and taking the decision out of the customer's hands altogether. Bringing tipped workers onto the minimum wage would eliminate one obstacle in the path to ensuring better pay. The next would be to secure a substantial wage increase for all low-paid workers. In the meantime, customers can revert to tipping because they want to, not because they have to.  

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