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Just the tip – an overlook on tipping economics

Tipping is quite an interesting and polarizing phenomenon that raises many discussions – from social and behavior economics (what is the economic benefit of tipping for the consumer? Does tipping work as a reward for good service?) to labor economics and taxation since millions of workers, on USA alone, derive most of their income on tips (is this an adequate incentive? is this income being properly taxed? How much of it is taxed at all?).

This practice started in England about 500 years ago, was adopted in other countries in Europe, and arrived to the US in the late nineteenth century. Although it was replaced in several European countries by service charges in the twentieth century, in the US it became a prevalent share of income, if not all of it, in a variety of occupations.

Nowadays, servers alone represent at least 20 percent (Wessels, 1997) of minimum wage workers in the USA and there is the possibility of being paid less than the minimum wage: “An employer of a tipped employee is only required to pay $2.13 per hour in direct wages if that amount combined with the tips received at least equals the federal minimum wage. If the employee’s tips combined with the employer’s direct wages of at least $2.13 per hour do not equal the federal minimum hourly wage, the employer must make up the difference.”

However, there are cases where servers do profit from tipping (Sinay, 2001) even though they are paid less by their employees: take for example the tipped wage movement in the US. It is important to consider though that tipping is very popular between servants partly because most of the time it is “free” of taxes – even though digital tipping is easier to tax. Will servers really prefer tipping to “complete” wages if all of their income starts being taxed?

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Source: NJRA

Tipping is a specific type of economic behavior, since it doesn’t fit in the “rational behavior” theory – it is not much a reward as it is a social contract between two parties, the server and the consumer. And although it is kind of romantic to conceive tipping as the product of a bond that was established between server and consumer, it also raises problems, untaxed income being the more serious of them.

An interest thing to consider is that tipping does not control server quality. It would seem like an obvious advantage but research indicates that while tips are a reward for service, they are not a good way to motivate workers, measure their performance or identify dissatisfied customers. Azar (2003) defends tipping is so generalized because it is a social norm – people tip because they feel guilty or embarrassed if they don’t.

It will be very difficult to end a practice that is based on a social norm and not a simply legal obligation. Even though employers may consider paying higher wages in order to relieve costumers from the burden of tipping, it is very unlikely that customers will stop tipping by decree, just as it would be difficult to stop businessmen from wearing suits in the summer – although not a rational decision, as many complain about the excessive heat, people would not feel adequate without it, since it has become the social norm.

References:

Sinay, R. (2001), “Trying to protect waiters reduces their income”, Ha’aretz, 4 June (in Hebrew).
Wessels, W.J. (1997), “Minimum wages and tipped servers”, Economic Inquiry, Vol. 35 No. 2, pp. 334-49.

Ana Martins, 734

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Author: studentnovasbe

Master student in Nova Sbe

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