The Economics of Tipping — Reading

Passage

A Tipping is difficult to explain using standard economic assumptions. A payment made after a service has been delivered, to someone the payer will probably never meet again, and which no law requires, ought not to happen. Yet in some countries it accounts for a substantial share of the income of millions of workers. The behaviour is real and widespread, which means the assumptions rather than the behaviour need adjusting. B The historical route is unexpected. Tipping was a European aristocratic custom that arrived in the United States after the Civil War, and was initially resented there as undemocratic — an importation of servility incompatible with a republic. Several states legislated against it in the early twentieth century. Those laws were repealed, and the practice became entrenched by a specific legal mechanism: employers of tipped workers were permitted to pay a reduced minimum wage on the assumption that tips would make up the difference. The federal tipped minimum wage in the United States has not risen since 1991. C That mechanism explains why the custom is so much stronger in some countries than others. Where wages are low and tips fill the gap, tipping is effectively compulsory and its absence is a real loss to the worker. Where service staff are paid a full wage, as in much of continental Europe and in Japan, tipping is modest or absent, and in Japan it can cause embarrassment. The difference is not one of national generosity but of who is expected to pay the wage. D If tips rewarded service, the amount left should track how good the service was. It barely does. Studies repeatedly find the correlation between rated service quality and tip percentage to be weak — typically explaining under five per cent of the variation. Considerably stronger predictors are the size of the bill, the weather, whether the server touched the customer briefly, drew a smiley face on the receipt, or repeated the order back verbatim. What is being rewarded appears to be rapport and social convention rather than performance. E The distributional consequences are the most serious objection. Because tips are given by customers rather than set by employers, they carry customers' preferences, and research in the United States has repeatedly found that non-white servers receive lower tips for equivalent service. Reliance on tipping also leaves workers dependent on the goodwill of the people they serve, which has been linked to a reduced willingness to report harassment. F Attempts at reform have mostly failed instructively. A number of well-known American restaurants abolished tipping in favour of higher menu prices and higher wages, and most reversed the decision. Customers, faced with visibly higher prices, went elsewhere even when the total cost was identical; and the best servers, who had earned most under tipping, left for restaurants that retained it. The obstacle proved to be neither economics nor ethics but the visibility of the price. G What emerges is that tipping persists because it distributes a cost in a way that suits almost everyone involved except the worker. Employers pay less in wages. Customers see lower prices on the menu and retain a feeling of discretion. Restaurants shift the risk of a quiet evening onto staff. The practice is stable not because it is efficient or fair, but because changing it requires someone to absorb a cost that is currently borne by the person with the least power to refuse it. H A small number of restaurants, mostly at the higher end of the market, have experimented with abolishing tipping outright and folding service into menu prices instead, and their experience illustrates why the practice has proven so resistant to reform from within the industry. Removing tips typically requires raising prices by somewhere between fifteen and twenty-five per cent to preserve server income at its previous level, a jump customers frequently perceive as the restaurant becoming more expensive even when their total bill, tip included, is unchanged or lower. Some venues that adopted no-tipping policies later reversed them after losing staff to competitors that still allowed tipping, since top-performing servers in a tipping system can substantially outearn a fixed hourly wage, and a no-tipping policy that equalises pay tends to reduce the ceiling even as it raises the floor. The reforms that have proven more durable tend to be incremental — a mandatory service charge distributed among all staff including kitchen workers, who receive nothing under a traditional server-only tipping model — rather than the wholesale abolition that generates the most attention. The economics resist a clean solution because almost any change redistributes income from someone who currently benefits from the status quo.

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