Tipping in the United States: Supplement or Subsidy?

Tipping-in-the-US

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Tipping in the United States:
 Supplement or Subsidy?

The average American eats 5 meals per week in a restaurant; however, many of those customers don’t understand what’s behind the tip they left on the table. Those tips, which total over $42 billion dollars a year, don’t just go to your server as a way of saying ‘thanks’. Many of those tips actually go to the employer so that they can pay their servers far less than minimum wage. So, let’s take a closer look at your tip to figure out if it’s supplementing minimum wages or subsidizing poor ones.

How Tipping is Perceived

Public Misconceptions

“Uh-uh, I don’t tip.
No, I don’t believe in it. …
I don’t tip because society says I have to. …
I’ll tip if someone really deserves a tipping, if they really put forth the effort, I’ll give them something extra,
but I mean this tipping automatically, it’s for the birds.
I mean as far as I’m concerned they’re just doing their job.
These ladies aren’t starving to death. They make minimum wage.
I used to work minimum wage and when I did I wasn’t lucky enough to have a job that society deemed tip worthy. …
But no, society says don’t tip these guys over here, but tip these guys over here. …
I mean I’m very sorry the government taxes their tips. …
I mean show a piece of paper that says the government shouldn’t do that, I’ll sign it, put it to a vote, I’ll vote for it,
but what I won’t do is play ball.”
– Mr. Pink in Reservoir Dogs

Equity Theory

Economists say that tipping exists because it is the most efficient way to incentivize workers. One reason for this can be found in a psychological theory called ‘equity theory’.

Simply put, equity theory proposes: There must be ‘equity’ or ‘fairness’ between what a worker puts into their job (inputs) and what they get out of it (outputs).
• Inputs include: Time, Effort, Loyalty, Hard work, Commitment, Skill, Ability, Adaptability, Flexibility, Tolerance, Determination, Enthusiasm, Trust in superiors, Support of colleagues, Personal sacrifice.
• Outputs include: Salary, Benefits, Perks, Job security, Recognition, Reputation, Responsibility, Sense of achievement, Praise, Stimulus, Growth, Thanks.

Theoretically, a tip shows gratitude for a worker’s input with a proportional amount of output.

Essentially, consumers leave larger tips based on their evaluations of better service and workers provide better service in hopes of getting larger tips.

However

The Equity theory largely ignores the standard American socially-accepted 15-20% rates for restaurant servers. This practice finds its origins within doubling the tax rates attached to the price of the food. For example, when taxes on food were around 5%, customers would tip servers around 10%. As tax rates have changed, so have the acceptable percentages of tips.

What started as a way to reward service quality and increase economic efficiency has become:
• an obligation for tippers
• a matter of survival for the server
• and a matter of profit for the employers. Here’s how…

How Tipping Really Works

Subminimum Wage
Prior to 1966 a server’s pay was not regulated, leaving many servers dependent on tips alone, without any additional wage paid by their employers.

Subminimum wages were first introduced in 1966, and they were set at 50% of the minimum wage – a huge leap toward wage equality.

In 1979, the tipped wage rose to 55% of the minimum wage, and to 60% in 1980. A decade later it dropped to 55% and in 1991, the 50% mark was $2.13 per hour.

In 1996, future 2012 Presidential candidate Herman Cain, as chairman of the National Restaurant Association, lobbied successfully against pay increases for servers; agreeing to a raise in the federal minimum wage, but on the condition that subminimum wages remained frozen at $2.13 per hour.

So… for 23 years, the subminimum wage has remained at $2.13 per hour. And today, that constitutes only 29% of the minimum wage.

This subminimum wage, $2.13 per hour, can legally be given to a tipped employee who “customarily and regularly” receives only $30 per month in tips.

However, at $2.13 per hour, a full-time tipped employee is only paid $369 per month, and still needs to make an extra $887 per month in tips just to earn a minimum wage.

Tip Credit

Most states allow employers to claim a “tip credit” which lowers the amount of money an employer has to pay a tipped worker.

The maximum tip credit an employer can claim is the minimum wage minus the subminimum wage; federally that’s $5.12/hr ($7.25 – $2.13 = $5.12).
• If a server makes enough tips to bring her total wages up to minimum wage then the employer is justified in only paying $2.13/hour.
• If a server doesn’t make enough tips to bring her total wages up to minimum wage then the employer has to pay the difference.

However, employers often overlook this requirement and when they get caught, only 30% change their ways. This helps explain why 16% of servers earn less than minimum wage.

Think of it like this:
• If Mary gets paid $2.13/hr and is tipped nothing, her boss pays another $5.12/hr. So, Mary earned $7.25/hr, the public paid her nothing and her boss paid her $7.25/hr.
• If Suzy gets paid $2.13/hr and is tipped $4.00/hr, her boss pays another $1.12. So, Suzy earned $7.25/hr, the public paid her $4.00/hr and her boss paid her $3.25/hr.
• If Anne gets paid $2.13/hr and is tipped $6.00/hr, her boss pays nothing more. So, Anne earned $8.13/hr, the public paid her $6.00/hr and her boss paid her $2.13/hr.

The more you tip, the less the boss has to pay.

In other words: The first $5.12/hr that you tip is not a supplement to the server’s minimum wage. It’s a subsidy for employers not to pay minimum wage. You’re paying 71% of the restaurant’s server payroll.
And that $5.12 subsidy only goes up as the federal minimum wage goes up, since subminimum wage is frozen at $2.13. And as a result, tipping norms will go up… indefinitely.

Now think of it without the tip credit:
• If Mary gets paid $7.25/hr and is tipped nothing, her boss pays nothing extra. So, Mary earned $7.25/hr, the public paid her nothing and her boss paid her $7.25/hr.
• If Suzy gets paid $7.25/hr and is tipped $4.00/hr, her boss pays nothing extra. So, Suzy earned $11.25/hr, the public paid her $4.00/hr and her boss paid her $7.25/hr.
• If Anne gets paid $7.25/hr and is tipped $6.00/hr, her boss pays nothing extra. So, Anne earned $13.25/hr, the public paid her $6.00/hr and her boss paid her $7.25/hr.

In other words: Your tips would give servers upward mobility instead of paying her boss not to pay her.

The Poor Results

Given this system, it’s no wonder that:
• States with a full-tip credit (they follow the federal subminimum wage) have the highest poverty rates among servers at 19.4%. [Alabama, Georgia, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Nebraska, New Jersey, New Mexico, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Wyoming]
• States with a partial-tip credit (they raised their subminimum wage) have a 16.2% poverty rate among servers. [Arizona, Arkansas, Colorado, Connecticut, Delaware, DC, Florida, Hawaii, Idaho, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Missouri, New Hampshire, New York, North Dakota, Ohio, Pennsylvania, Rhode Island, Vermont, West Virginia, Wisconsin]
• States that abolished the tip credit have the lowest poverty rate among servers at 13.6% AND they are 25% less likely to fall into poverty than servers in states that allow tip credits. [Alaska, California, Minnesota, Montana, Nevada, Oregon, Washington]

But still, servers are almost 3x as likely to live in poverty than the rest of the U.S. workforce.
• The overall workforce poverty rate is 6.3%.
• The overall server workforce poverty rate is 16.7%
• And, 63% of a server’s income are tips, which can fluctuate wildly, adding to their financial burdens.

And it disproportionately effects women. Of the 2.3 million tipped workers employed as waiters or waitresses:
• 71% are female, 29% are male.
• Compared to 49% female/51% male for the general workforce.
• And women servers earn 79% of their male server counterparts.

The irony of working in the food industry is that servers are twice as likely to rely on food stamps.

Many of those who serve our food, mostly women, can’t afford to eat.

Tipping-in-the-US

Sources:
1. http://www.cnn.com/2013/01/31/health/diet-eat-out/
2. http://mpra.ub.uni-muenchen.de/4457/1/MPRA_paper_4457.pdf
3. http://www.dol.gov/dol/topic/wages/wagestips.htm
4. http://scholarship.sha.cornell.edu/cgi/viewcontent.cgi?article=1022&context=articles
5. http://www.mindtools.com/pages/article/newLDR_96.htm
6. http://www.bonappetit.com/columns/the-foodist/article/how-much-should-i-tip
7. http://www.epi.org/publication/work-dignity-unfinished-march-decent-minimum/
8. http://inthesetimes.com/working/entry/12005/herman_cain_the_other_nra_and_the_stagnant_minimum_wage
9. http://www.bls.gov/cps/minwage2012tbls.htm#4
10. http://s1.epi.org/files/page/-/BriefingPaper297.pdf
11. http://www.dol.gov/whd/state/tipped2013.htm
12. http://www.payscale.com/data-packages/tipping-chart-2013
13. http://www.bls.gov/oes/current/oes353031.htm
14. http://rocunited.org/wp-content/uploads/2012/02/ROC_GenderInequity_F1-1.pdf