By Michael L. Lahr, Rutgers Economic Advisory Service (R/Econ™) for New Jersey State Policy Lab
In a recent article, New York Times reporter Christina Morales writes about the spread of “tipping fatigue,” noting how electronic screens now recommend tips as high as 35 percent of the bill and how these screens are cropping up at new places, like bakeries, movie theaters, and concession stands. This is despite higher prices and, in some cases, a pandemic-era addition of service and delivery charges. Morales acknowledges the need and desire for more generous tipping during the thick of the pandemic. “In April 2020, the average tip at a quick-service food business was 23.5 percent, up from 19.6 percent the previous month. But that figure has steadily fallen since then, to 19.8 percent last month.”[1] She also cites the social pressure of selecting a tip percentage in front of the worker, so called “guilt tipping.” This pressure is largely a result of the wholesale move during the pandemic to the use of credit cards. Hardly anyone carries cash for tip jars anymore.
Still, why do we feel guilty about such tipping pressures at establishments where only a tipping jar previously existed? And why are tips inflating as a percentage of the bill?
It is not clear precisely how and when the practice of tipping began. But it was certainly underway in England by the 16th century where brass urns in coffee houses and pubs were inscribed with the words “To Insure Promptitude,”[2] from which some scholars suggest “tip” was derived as an acronym.[3] Back then, people apparently tipped beforehand to secure the services of a helper who otherwise received no wage at all.
Today, tipping norms vary from country to country and, where practiced, tend be granted after service is provided. For example, today in most European restaurants, the tipping practice consists of adding perhaps a few coins to a minor rounding up of the bill. In North America, the tip has become a social norm or expectation formalized as percentage of the bill, straying somewhat from its original, simple purpose as pure expression of gratitude. In the early 1970s, it transitioned from 10 to 15 percent at the finest establishments,[4] and by the late 1990s that figure had edged closer to 20 percent.[5] As we have made a near-wholesale shift to using credit cards rather than cash over the past two years, tip suggestions as high as 35 percent have cropped up on screens and credit receipts.
Why and whom do we tip? It turns out that, all parties involved—the customers, the servers, and the business manager—have reasons to encourage the practice of tipping. As for who is tipped, research suggests that tipping tends to arise in occupations that transfer money from high- to low-income individuals.[6] Thus, tipped occupations are those in which workers deliver customized service and customers are better equipped to evaluate workers’ performance than are the workers’ managers.[7]
Servers like tips because, nationwide, they represent about 62 percent of their incomes and 43 states have a sub-minimum wage for workers who are tipped.[8] In February 2019, New Jersey enacted Assembly Bill 15 that gradually raises the minimum wage for tipped employees from the present $7.87 per hour to $9.87 per hour by 2024 (from 60.5 percent to 68.5 percent of the state’s regular minimum wage). The two-tiered minimum wage system, like that in New Jersey, makes tips a rather precarious source of income for many service workers. It, therefore, should come as little surprise, at least for servers in states with a two-tiered minimum wage, that tips are a strictly good thing.
Customers like tipping too as it gives an incentive for servers to provide high-quality service, at least in the long run. Surprisingly, however, the tipping percentages that customers give are, at best, only weakly related to service quality.[9] Instead, people are more apt to tip liberally to be perceived as generous or to display empathy for the server.[10] Psychologists have gone so far as to suggest that tipping is a form of ego massage calculated to enhance the self-image of the tipper.[11] Thus, in the case of less-than-ideal service, people may leave the socially accepted tip strictly to avoid social distain. Clearly, tipping generates social pressure for the customer.
Business managers prefer tipping because it enables them (i) to advertise lower prices, (ii) to avoid undue customer-service monitoring, and (iii) to retain their best front-line workers.[12] Replacing tips with higher wages requires change in the way the business operates. And such change can be costly—some costs possibly unforeseen—and the benefits of the change to a restaurant’s success and profitability can be, at best, unclear.[13] A restaurant that converts away from tipping to higher prices requires at least the development of new prices and, thus, new menus. Further, the higher prices required of no-tipping restaurant can repel customers.
Ultimately, tipping allows business managers to pay their workers a lower wage. As a result, tipped workers, particularly waiters and bartenders, are far more likely to live in poverty than are other workers, including waiters and bartenders in states that have a single minimum wage, the so-called “equal-treatment states”—Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington.[14] Many workers who earn insufficient wages tend to rely on public support programs. While it is good that workers can turn to public programs for assistance when the need arises, such programs are not designed to be a permanent wage subsidy for businesses. Meanwhile, most research suggests that a higher minimum wage for tipped employees would likely have little effect on employment and yet a fairly strong effect on worker earnings, perhaps enough to pull many working poor out of poverty.[15] This result arises because lower-cost competition in industries that tip can only be accessed by crossing state boundaries since states set minimum wages. But other research suggests that consumers tip more generously in those states that have larger differences between the regular and tipped employee minimum wage.[16] Thus, policymakers advocating for “equal treatment” of the tipped workforce should proceed cautiously.
Tips in the U.S. tend to be distributed among service staff in one of three ways. Tip-keeping, tip-sharing, and tip-pooling, in order of the degree of control by the server directly receiving the tip. The distribution policy selected affects the nature of worker recruitment and retention. Of the three, tip-pooling has been gaining traction, due to the rising use of credit and debit cards. In this policy, tips from all servers are placed into a common pool and re-distributed among staff according to rules set by the employer or senior workers. Servers apparently tend not to prefer tip-pooling, in part, because the tips can possibly be redistributed to staff or (illegally) supervisors[17] who might typically get none. But it can improve customer service when they are able to monitor one another.[18] It also could adjust customers’ motives for tipping, given whom they wish to reward for service rendered and customers apparently prefer rewarding service workers with whom they have direct contact.[19]
The inflating tipping percentage is a matter that has received less investigation. But all research to date suggests that service providers who present customers with higher default tipping levels collect more money in the form of tips. Moreover, doing so appears to have little effect upon customer satisfaction or patronage frequency.[20] Still, customers get a greater sense of control when the tipping default values on their bill are lower and yields a more pleasurable dining experience.[21] Moreover, explicit requests by the server to tip can have deleterious effects on tip size.[22] This suggests that managers should be wary of adopting high default tipping percentages, since, at a minimum, they can negatively affect customer online ratings.
While controversial, ultimately, tipping is discretionary. Customers, servers, and business manager have reasons to like the practice of tipping. Raising the social norm for the tipping percentage and the shift toward tip pooling can have deleterious effects on businesses’ reputations. However, it seems that the general public, not just customers, are subsidizing many employers indirectly by paying taxes that fund the public assistance received by those tipped employees living in poverty. The risks are quite high for those industry employers who act on their own to pay their waitstaff the standard minimum. Thus, it seems such exploitation can only be stopped by abolition of the two-tiered minimum wage system that is applied to tipped workers. This action has been undertaken by seven equal-treatment states, which display lower poverty rates than do other states with populations that include restaurant wait staff and bartenders.
