Hannah Katz: The Pros and Cons of Tipping Culture

Link to Hannah Katz’s LinkedIn Homepage

I am delighted to host another student guest post by Hannah Katz. This is the 7th student guest post of this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link.

Evidence shows that although the tipping culture is actually an economic advantage for those who can take full advantage of the system, not every waiter is able to do so due to discriminatory factors.

Tipping expectations around the world are vastly different, depending on who you ask. Any U.S. waiter would answer 20% of the total bill, while a Japanese citizen might be confused on what tipping even means. In the United States there exists a federal minimum wage for most careers, but waiting tables is not technically one of them. Although employers are technically supposed to pay the difference if a waiter does not clear minimum wage with his/her tips, in most cases the cost of waiters’ wages is passed on to the consumer in the form of a tip. The tipping culture is actually an economic advantage for those who can take full advantage of the system, but not every waiter is able to do so due to discriminatory factors.

In the Southern Economic Journal article“The Effect of the Tipped Minimum Wage…”, authors William Even and David Macpherson study the effect of a raised tipped minimum wage on full-service restaurant employees. Even and Macpherson studied national data and concluded that if the minimum wage for servers was increased and the expectation for tips was decreased, then full-service employees would suffer reduced employment by restaurants. This indicates that if the cost of servers’ wages were forced onto restaurant owners, effectively raising the minimum wage that most restaurants have to pay their servers, the same result would occur. Clearly, reducing the burden on restaurants by maintaining the practice of tipping is advantageous to waiters.

Another huge advantage of tipping to waiters is that cash tips often go unreported. Anecdotally, I know many waiters that do not fully report their tips to the IRS. Somehow, this is considered normal practice although it is certainly tax fraud. The IRS estimated a $290 billion gap in self and true reported income last year, according to BakerTilly’s article “IRS Targets Tip Income..”, and the gap may be even higher.

Although tipping culture may be beneficial to servers, the practice isn’t exactly fair. As Freakonomics radio host Stephen Dubner points out in “Should Tipping be Banned?”, tips that servers receive correlate to their race, attractiveness, and other discriminatory factors. Basically, the customer of a restaurant has the power to determine the wages of a server and discriminatory practice is unregulated. There is no Human Resources department in restaurants that a waiter can appeal to if he/she feels undercompensated because of discrimination. This data is supported in Tipping Research’s paper Predictorsof Male and Female’s Average Tip Earnings, which found that servers received more tips if they were rated as more attractive, as opposed to years of experience and friendliness, which were uncorrelated with tips.  

The tipping culture in the United States and other Western countries is not going away any time soon. Restaurants and waiters both benefit from the system, and customers are so used to it that no widespread action will be taken anytime soon. But perhaps it is time to question this system that causes such a huge gap in true and reported income, and can be discriminatory in nature.