A High Tipping Culture Transfers Risks To Labour Which Should Be Borne By Capital

Americans like to make the argument that tipping engenders good service and that without a significant at risk component to remuneration, employees in the service sectors will lack the incentive to do anything beyond that which keeps them from getting fired. Additionally, a tipping culture allows low minimum wages, which helps create employment.

An alternative view is that an employment structure in which tipping constitutes a high proportion of income, possibly even the majority, transfers to labour risks which should be borne by capital and does not lower costs for customers. It creates excessively low minimum wage expectations and precedents which partly flow to other sectors and erodes the work ethic by creating a gouging mentality in both employers and employees.

One problem with tipping in the US is that expectations seem to have increased over time, to the point where the expected amount is excessive. Expectations also seem to vary across the country.

I went there in the early 1990's and was told 10 - 15% was a good tip for a restaurant. I went back in 2004, gave a 15% tip and got a funny look. I thought I was doing the right thing. It was only when I asked a bartender about it the next evening that I discovered 20% is now normal for good service.

A very low minimum wage of $2.13 an hour plus an expectation of 20% tips is an underhanded way for the employer to pass a significant part of the business risk back onto their employees. Even though US law is that the employer must make up the difference if tips are not sufficient to raise the total remuneration to $7.25 per hour, that is still a very low wage, certainly well below what most employees would expect (and need).

Bad service can hurt a business, but businesses which have good service can also suffer declines in customers and revenue. These are sometimes a result of the economy, but often primarily due to poor management.

The point is that in service industries such as restaurants and bars, where staff are not expected to actively develop the business as a salesman on commission would be, income volatility is a business risk which should be borne by capital. Labour do bear some of the risk due to the possibility of layoffs, however they should not be expected to bear continuous income volatility without participating in capital growth.

Sales jobs typically have low guaranteed income components and significant commissions. But this high proportion of at risk remuneration is reasonable because sales people are expected to actively develop the business as part of their jobs.

Suppose a restaurant has less customers, as AppleBee's probably will now, due to a boycott. That's ultimately the fault of management. But it's the staff who suffer by being paid less because there are less customers to give them tips in the first place.

Even if a restaurant is well patronised, that is no guarantee the expected tip for good service will result in the expected income for staff. There will always be dickheads who won't tip anywhere near 20%, even for good service. There will be foreigners who do not know how much tip is expected. So, the staff aren’t receiving the intended remuneration.

Why should the staff experience volatility of income due to forces outside their control? How does this help maintain a stable society, when employees can’t pay their rent or telephone bill because no customers came into the restaurant, or the few who did were stingy?

A large, expected tipping percentage does not decrease costs for customers. If employees are receiving $20 per hour, with $17 of that coming from tips, the customers are effectively paying their wages via the 20% added to their bills. Higher wages and lower tips would result in the same total bill.

Additionally, tips being a high proportion of wages encourages staff to try to get the customer out as quickly as possible, to maximise the number of tipping customers during the shift. That helps the business owner, but detracts from the customer experience. A good system if you believe restaurants exist solely to make money for the owner and staff, rather than for people to enjoy a dining experience.

Some make the argument that restaurant staff shouldn’t complain about a low minimum wage / high tip balance because a significant portion of their income is undeclared, so they don’t pay tax on it. But do we really want to structure part of our economy around tax evasion?

Put menu prices up 15%, pay staff a meaningful wage, plus a small tip if service was good. Let the business owner take the financial risk, or else give staff shares in the business commensurate with the risks to which they are being involuntarily enjoined.

A second problem with tipping in the US is that it’s confusing and tiresome, because it's ubiquitous. No one will get off their arse and do their job unless they are given extra, because everyone from the taxi driver to the bartender to the doorman to the maid to the guy operating the lift expects a tip.

For example, a porter's job is to take your bags to your room. Why do they deserve $1 a bag or whatever it is from me as well? Why does the maid get a tip for cleaning my room? Just add in the value of the tips to the cost of the room, pay the porters and maids a liveable wage and get them to do their jobs.

When I was in New York a few years ago, I stayed in a small hotel on 11th St. The porter had a key to operate the lift and WOULD NOT take anyone up or down in it unless they tipped him. Seriously.

Had he leased the lift from the building owner, I could understand.

That's the kind of menial job which should just be paid at minimum wage. If the employee won't do it properly, sack them and hire one of the dozens of other people who would apply.

The problem is that such a system cultivates a gouging mentality, where employers screw employees with low wages and employees screw customers by refusing to do their jobs properly (or at all) unless the customer coughs up extra. It devalues pride in one's work and doing a good job out of respect for yourself and others.

The term “work ethic” means a belief that work of itself creates value: that as well as being an immediate economic addition, it is character building. At the very least, the satisfaction of doing a task well has a positive psychological effect, not just on the person doing the task, but as an example to others. People would not work as volunteers for charities without a work ethic.

What is not part of a work ethic is an attitude of refusing to do any task unless paid, no matter how trivial.

The quid pro quo is that societies which desire the creation and / or reinforcement of a genuine work ethic need a commensurate minimum wage regime. Statutory minimum wages for manual labour and low skilled service jobs must be sufficient that employees can afford the basic necessities of life. They must be at a level which says that society values the work done so it mandates that all full time employees’ non at risk remuneration is sufficient to participate in society.

Why would a person continue to work hard in a free society if their effort did not provide them with sufficient income to participate meaningfully in that society? Conversely, why would many people continue to work hard in a society which catered to their needs, regardless of their output?

A genuine work ethic can only survive in a society which says to its citizens: Do your job well and you will be able to afford rent, food, clothing, utilities … all the necessities of life. Do your job without concern for quality and you’ll lose it, together with your access to the above.

My third point against a high tipping culture is that it creates excessively low minimum wage expectations and precedents which partly flow to other sectors. To prove the flow to other sectors requires an academic paper in economics, so I will simply posit it as a thesis and provide a heuristic argument.

A minimum wage of $7 per hour in Australia or the US is unliveable and thus excessively low. It’s all very well to argue that many of these employees in fact receive much more than this, however if the business has few customers, they may not.

In the US, many non tip jobs have statutory minimum wages which are well below Australia’s.

I was recently watching a Four Corners program on homelessness in the USA post GFC. They interviewed a 52 year old family man who had been laid off from his sales job and eventually found some menial, customer facing role at Disney World in Florida. After 2 years, he had received a promotion, which took his pay from $7.40 to $8.20 an hour. He said he takes home $228 per week after tax. His family pays $149 per week rent in a long stay motel. Even converting at the longer term $US/$AUS currency rate of 75 - 80c, his take home pay is around $A300 per week, after his promotion!

His situation is apparently not unusual. There are many people in the US working for $7.25 per hour with no tips. Would this be possible if US restaurant staff received 5 - 10% tips and $15 per hour?

I’m not saying that all tipping leads to negative outcomes.

In some industries, the possibility of a small gratuity as an incentive gives better outcomes than none. This is only in part due to the financial reward. The tip clearly conveys the sentiment that the customer is happy and the staff have done a good job. The value of such emotional reinforcement versus the financial reward should not be underestimated.

Obvious examples are restaurants and cocktail bars (where they actually bring your drink to your table). Tips work in these industries because of the amount of time staff and customers spend in contact and the scope for enhancing the customer experience with advice, attentiveness, a friendly attitude etc. In Australia, it’s 5 - 10%, depending on how happy you are with the service.

Tips also work in other service industries. I’ll tip the hairdresser if I get a head massage. I’ll tip the taxi driver if I have some suitcases and he loads and unloads them for me. There are more “under the table” tips, such as giving your mechanic a case of beer if he goes out of his way to save you money on parts and overlooks the small crack in the windscreen when your rego is due.

To this last end, even if someone is just pulling beers from the tap, if I’m buying a round and the cost is $18.50, I might give the bartender $20 and say: “Keep it”. I do that to establish a rapport with the bar staff. That’s for two reasons: because I drink there regularly or because I intend on having a few and don’t want to be refused service later in the evening.

But most jobs involve some service component. Why don’t we tip the bus driver? Or the postman and the garbos? Or the polite and knowledgeable employee who spent 20 minutes showing us televisions before we made up our mind? Or the bank manager who made the effort to process our home loan application quickly?

Because that way lies graft and corruption. Very soon, tips will become expected, then required. Wages will fall in real terms and everyone will have to be paid extra just to do their job, which means tax revenue will also fall. Discounts will be available to people who tip, affecting employers’ profit margins and hence taxation revenue and employment. This is how things (don’t) work in many parts of Asia, Africa and the Middle East.