The Economics of Tipping
Sunday, February 28th, 2010Here’s a link to a blog post from the New York Times “City Room” blog. In it, author David Sax bemoans the fact that food service employees expect tips for performing a wide variety of services and in a wide variety of contexts (bringing you food, mixing a drink, et cetera). He recognizes that tips are necessary due to the low minimum wage of these employees (lower than the minimum wage for jobs that don’t receive tips), but argues that we should instead fight for this wage to be raised, rather than continue to have to tip for everything. In this way, Mr. Sax misses out on the larger economic picture.
Tipping can be stressful, especially in the United States where is is both culturally expected and quite divergent from our usual economic transactions. We aren’t used to negotiating prices for almost anything; even purchases where it is expected, buying a car for instance, are regarded as some of the least fun purchases to make. We like to see a set price and make our decision based on that. Adding in an additional calculation for a tip complicates the purchase. Further, different areas of the country may have different expectations for tip percentage. I always tip 20% minimum, but out of town friends sometimes think I’m crazy to go so high. Tipping is complicated, so it’s no wonder that Mr. Sax is arguing against tipping.
The solution to eliminating tipping (or reducing its expected percentage), however, is not so simple as raising the minimum wage due to simple economics. Were the minimum wage to go up, restaurants would likely raise their food prices. It wouldn’t be so dramatic as to happen over night, but gradually the prices would rise in all restaurants affected by the change. Slow to change, however, would be the cultural norms of tipping. If the minimum wage went up by 10% and food prices followed, we would not expect to see a similar downward shift in the rate of tipping. Such a change would actually be doubly warranted, as higher wages mean less dependence of tipping and higher prices mean higher tips. Such a change might cap the rate of tips at their current level, but it would be unlikely that the tipping norm would actually decline.
Mr. Sax’s solution, then, is actually worse for his pocketbook. Even if he keeps tipping at 15% (as the article says he does), he would be forced to pay for the rising minimum wage in higher food costs and higher tips. And even if he did get his way and the cultural norms changed, economics would argue that the quality of service would decline, as service workers would have less motivation to work extra hard with the hope of earning a greater tip. Maybe Mr. Sax should think about what he really wants and argue for that instead, as I certainly don’t trust his economic solution to the issue of tips.