5 ms·

I'd love if an economist of somebody with a better financial background could comment on this: When you're giving a tip, you're effectively giving money to the

by blhack 10y ago

I'd love if an economist of somebody with a better financial background could comment on this: When you're giving a tip, you're effectively giving money to the people who own the company (or participate in profit sharing). Tips allow employers to pay their employees under market rate. By paying enough tip to bring the employee's wage up to the market rate, you are subsidizing the company's profit, not the employees profit. Tips are bad for employees because they are inconsistent, bad for consumers because the price of goods are not well-indicated, and good for employers because it allows them to offset their labor cost by hiding it in tips, which they have convinced consumers are going to the employees as a perk. So I don't know that I agree that the Uber app should implement tips (from a consumer or an employee standpoint). They should charge me more money (or rather, charge me the same as I am paying now, just make it more consistent), and pay their employees more money. I wish they would do both of these things.

cortesoft 10y ago
I think your logic is a bit flawed. If an employer can not get enough employees at the rate they are paying, they can either encourage tips to their employees to supplement their wages, or charge the customer more and pay their worker a higher salary. In the tip model, 100% of the extra money charged goes to the employee. In the charge more and pay more, the money might be split in other ways. I am failing to see how the tip model helps the employer more.
ryandrake 10y ago
Yea, I don't get where this idea came from that tipping is either good for the employee or good for the customer. The employee is getting paid a crappy wage and the customer is being guilt-tripped into making up for it. The only winner is the employer.
- SilasX 10y ago
  Don't forget that you're implicitly paying a premium to compensate for the unpredictability/lumpiness/[1] of the tips! [1] as well as "the presence of people who deliberately flout the expectations" and whose non-payment must be made up, in expectation, by more honest customers.
  - blhack 10y ago
    So essentially subsidizing the profit of the employer and subsidizing the cost of the goods that people who aren't adhering to the implied price structure are paying (non-tippers)! I wonder how this came about? Like was this something a clever businessperson invented at some point? It sounds like the US is the only place with a tipping culture like ours.
    - whathappenedto 10y ago
      One other side effect which is generally not discussed because it's contentious, is that a number of people who receive tips will underreport their tips. Especially those who receive cash tips. So the state and federal governments are partially subsidizing their wages too.
    - SilasX 10y ago
      I don't think "subsidizing profit" is an effect of the tipping system; what the restaurant gains in lower wages, it loses in higher effective food prices. In fact, I think, ignoring the tax evasion effect, the tipping system reduces profitability, because it scares away business by that "compensate-for-unpredictability" tax, which takes from what could be restaurant revenue.
- dikdik 10y ago
  I waited tables in college at a medium priced restaurant. On my great shifts I would pull down $50/hour on my best nights, $25-30/hour on typical weekends, and $10-20/hour on weeknights. Like most servers, I did not report most of my tips so it wasn't taxed. This was AMAZING for me, the employee. If I was an hourly worker, I doubt I would have gotten paid over $10/hour.
inimino 10y ago
There are cases where the employer is obligated to make up the difference if the minimum wage isn't reached by tipping. In that case, the alternative to you tipping the waiter $5 is that the restaurant charges you $5 more for your meal and passes that on to the waiter to meet the minimum wage requirement. If the restaurant eats the loss and doesn't raise prices, then you would be right, but restaurants already have thin margins and high competition so they would have to raise prices to raise wages and stay competitive. If tipping went away, menu prices would go up. However tipping is a form of price discrimination and an incentive for good service, which are both arguably good things. Obviously the much more common case is where the tip would not be replaced by the employer. So in that case if you don't tip the $5, the waiter is just $5 poorer. The restaurant's profit isn't affected one cent.
- inimino 10y ago
  To whoever downvoted this, I'd be interested to hear your reasoning.
prostoalex 10y ago
Anecdotal counterpoint to that is a restaurant switching to no-tip policy but then seeing its formerly tippable workers flee for a tip environment http://money.cnn.com/2016/01/19/pf/no-tipping-reversed-bar-agricole-trou-normand/index.html http://money.cnn.com/2016/01/19/pf/no-tipping-reversed-bar-a... Even though the former model offers stability and fair pricing, there are some outperformers in the tipping world which must take pride in their customer service skills. If no-tip and tip business coexist in the same industry, the adverse selection bias kicks in and the no-tip business gets stuck with average employees at best.
- madeofpalk 10y ago
  Yeah, this is the problem when an establishment bucks the local trend and becomes a "no-tip restaurant" exception. Go to a country where hospitality staff are paid a 'fair' amount and customers aren't expected to tip and this problem goes away.
  - vmarsy 10y ago
    Indeed this problem goes away. A new one pops up though: mediocre service, such as having to ask many times for refilling the tap water bottle or get condiments, and struggling to get the waiter's attention in general.
    - shard 10y ago
      I have not noticed any overall service problems in Korea, Japan, or China.
      - lz400 10y ago
        In fact, service in those countries is much better than in the US. I would even say that if there's a correlation between tipping and quality of service at the country level, is negative.
    - monksy 10y ago
      I have not seen this in most of Europe. I've seen more than enough times in the US. When I get service where the person just disappears for a long time and never pays attention to the table. I will refuse to tip and write the issue on the check.
gabesullice 10y ago
Thinking through this, kind of out loud. Let's just take restaurants as an example. You say "tips allow employers to pay under market rate," but that can't be the case as a matter of logic. The market rate is _defined_ by what employers pay employees-employers as a whole simply can't all be paying below market wages or else the market rate would just be lower. Perhaps you mean, "less than the market rate for similarly skilled labor in non-tipped sectors" (shoe sales, as an off+handed example). The question then becomes, "are the workers' skills in these sectors transferrable? Could workers simply change jobs if offered higher wages elsewhere?" If so, then it follows that we can assume that the negatives you mentioned, like lower wages and less predictability, would drive workers out of the tipped sector and into the non-tipped sector. This would drive wages back up in the tipped sector. We don't see that. What I think we see, and I admit this is a little anecdotal, is that restaurants (in healthy markets) are quite easily able to fill their positions. In fact, there's competition _for_ the positions amongst workers. The fundamental rule to keep in mind is that if workers are being underpayed, they would simply change their line of work, driving wages up as the of supply of labor thinned. But what we see is that on the low-ends of both markets, wages generally stick to the minimum wage. If tips were suddenly outlawed, do you think that restaurant wages would skyrocket to $30/hr? That's roughly the equivalent of 4 $40 tables with an 18% tip. I don't think so, because workers from other sectors would flood in from other sectors causing the wage to be pushed back down. A new equilibrium would probably be found somewhere just above the going rate in non-tipped sectors. If anything, tipping probably lowers wages for non-tipped employees more than the tipped ones. I think the more interesting experiment would be to see how take home pay would be affected in a "tip-only" restaurant. In most, places around the country, the minimum wage for tipped positions is ~$6/hr. Losing that would be like losing one ~$33 table. On the employer's side, they would gain ~$9 back when you account for payroll taxes. I think what we'd see is that most of that wouldn't just be pocketed by the employer, it would probably go back into the restaurant in the form of better ingredients, materials, marketing, and/or additional staff, all in hopes of increasing the number of tables turned overall. Non-luxury restaurant profits are driven by tables turned, not the price of each plate. E.G. hiring an extra busboy or dishwasher might help you turn over more tables more quickly, increasing restaurant profits and also the number of tips earned by the servers. I don't know, this is all an interesting thought experiment. In general, I'm pretty wary of "employers pay workers less by taking advantage of X" arguments. Unless it's poor government policy distorting the labor market or something like a recession, labor markets probably function like any other market. Supply and demand still reigns king. Underpaying employers will have a hard time keeping employees. Highly skilled workers in any sector will sell their talent to the highest bidder.
ThrustVectoring 10y ago
IMO the biggest reason for tipping is tax law. Tips technically have to get accurately reported as income to the IRS, but basically nobody ends up giving Uncle Sam the full amount. Random google searching says that something like 15-20% of cash tips get reported and taxed.
bernardvdw 10y ago
This is 100% inline with what I'm thinking. I am amazed by how many people don't realize that tips are mainly a scheme managed by the employer to guilt-trip the customers into paying an extra mandatory unpredictable amount of money. The thing that makes me so sad about it, is that the waiters are the first ones to guilt-trip the customers, but never the employers. It really hits a nerve when I read those blog posts from ex-waiters, explaining how difficult it is to "live with a waiter wage, so please make sure you tip 25% at least". That attitude is exactly the reason why employers continue to take advantage of employees. I agree that in the current state of things, tips are needed for waiters to survive. But it doesn't make any sense economically. If mandatory minimum wage was set for waiters, and tips were built-in, everyone would be better off.
solidsnack9000 10y ago
Tips avoid taxation, so employees can earn higher wages than they otherwise might, with customers spending less than they otherwise would, and owners paying out less than they otherwise would. Now, tips are not supposed to avoid taxation but it works out that way...

by blhack 10y ago

cortesoft 10y ago

I think your logic is a bit flawed. If an employer can not get enough employees at the rate they are paying, they can either encourage tips to their employees to supplement their wages, or charge the customer more and pay their worker a higher salary. In the tip model, 100% of the extra money charged goes to the employee. In the charge more and pay more, the money might be split in other ways. I am failing to see how the tip model helps the employer more.

ryandrake 10y ago

Yea, I don't get where this idea came from that tipping is either good for the employee or good for the customer. The employee is getting paid a crappy wage and the customer is being guilt-tripped into making up for it. The only winner is the employer.

SilasX 10y ago
Don't forget that you're implicitly paying a premium to compensate for the unpredictability/lumpiness/[1] of the tips! [1] as well as "the presence of people who deliberately flout the expectations" and whose non-payment must be made up, in expectation, by more honest customers.
- blhack 10y ago
  So essentially subsidizing the profit of the employer and subsidizing the cost of the goods that people who aren't adhering to the implied price structure are paying (non-tippers)! I wonder how this came about? Like was this something a clever businessperson invented at some point? It sounds like the US is the only place with a tipping culture like ours.
  - whathappenedto 10y ago
    One other side effect which is generally not discussed because it's contentious, is that a number of people who receive tips will underreport their tips. Especially those who receive cash tips. So the state and federal governments are partially subsidizing their wages too.
  - SilasX 10y ago
    I don't think "subsidizing profit" is an effect of the tipping system; what the restaurant gains in lower wages, it loses in higher effective food prices. In fact, I think, ignoring the tax evasion effect, the tipping system reduces profitability, because it scares away business by that "compensate-for-unpredictability" tax, which takes from what could be restaurant revenue.
dikdik 10y ago
I waited tables in college at a medium priced restaurant. On my great shifts I would pull down $50/hour on my best nights, $25-30/hour on typical weekends, and $10-20/hour on weeknights. Like most servers, I did not report most of my tips so it wasn't taxed. This was AMAZING for me, the employee. If I was an hourly worker, I doubt I would have gotten paid over $10/hour.

inimino 10y ago

There are cases where the employer is obligated to make up the difference if the minimum wage isn't reached by tipping. In that case, the alternative to you tipping the waiter $5 is that the restaurant charges you $5 more for your meal and passes that on to the waiter to meet the minimum wage requirement. If the restaurant eats the loss and doesn't raise prices, then you would be right, but restaurants already have thin margins and high competition so they would have to raise prices to raise wages and stay competitive. If tipping went away, menu prices would go up. However tipping is a form of price discrimination and an incentive for good service, which are both arguably good things. Obviously the much more common case is where the tip would not be replaced by the employer. So in that case if you don't tip the $5, the waiter is just $5 poorer. The restaurant's profit isn't affected one cent.

inimino 10y ago
To whoever downvoted this, I'd be interested to hear your reasoning.

prostoalex 10y ago

Anecdotal counterpoint to that is a restaurant switching to no-tip policy but then seeing its formerly tippable workers flee for a tip environment http://money.cnn.com/2016/01/19/pf/no-tipping-reversed-bar-agricole-trou-normand/index.html http://money.cnn.com/2016/01/19/pf/no-tipping-reversed-bar-a... Even though the former model offers stability and fair pricing, there are some outperformers in the tipping world which must take pride in their customer service skills. If no-tip and tip business coexist in the same industry, the adverse selection bias kicks in and the no-tip business gets stuck with average employees at best.

madeofpalk 10y ago
Yeah, this is the problem when an establishment bucks the local trend and becomes a "no-tip restaurant" exception. Go to a country where hospitality staff are paid a 'fair' amount and customers aren't expected to tip and this problem goes away.
- vmarsy 10y ago
  Indeed this problem goes away. A new one pops up though: mediocre service, such as having to ask many times for refilling the tap water bottle or get condiments, and struggling to get the waiter's attention in general.
  - shard 10y ago
    I have not noticed any overall service problems in Korea, Japan, or China.
    - lz400 10y ago
      In fact, service in those countries is much better than in the US. I would even say that if there's a correlation between tipping and quality of service at the country level, is negative.
  - monksy 10y ago
    I have not seen this in most of Europe. I've seen more than enough times in the US. When I get service where the person just disappears for a long time and never pays attention to the table. I will refuse to tip and write the issue on the check.

gabesullice 10y ago

Thinking through this, kind of out loud. Let's just take restaurants as an example. You say "tips allow employers to pay under market rate," but that can't be the case as a matter of logic. The market rate is _defined_ by what employers pay employees-employers as a whole simply can't all be paying below market wages or else the market rate would just be lower. Perhaps you mean, "less than the market rate for similarly skilled labor in non-tipped sectors" (shoe sales, as an off+handed example). The question then becomes, "are the workers' skills in these sectors transferrable? Could workers simply change jobs if offered higher wages elsewhere?" If so, then it follows that we can assume that the negatives you mentioned, like lower wages and less predictability, would drive workers out of the tipped sector and into the non-tipped sector. This would drive wages back up in the tipped sector. We don't see that. What I think we see, and I admit this is a little anecdotal, is that restaurants (in healthy markets) are quite easily able to fill their positions. In fact, there's competition _for_ the positions amongst workers. The fundamental rule to keep in mind is that if workers are being underpayed, they would simply change their line of work, driving wages up as the of supply of labor thinned. But what we see is that on the low-ends of both markets, wages generally stick to the minimum wage. If tips were suddenly outlawed, do you think that restaurant wages would skyrocket to $30/hr? That's roughly the equivalent of 4 $40 tables with an 18% tip. I don't think so, because workers from other sectors would flood in from other sectors causing the wage to be pushed back down. A new equilibrium would probably be found somewhere just above the going rate in non-tipped sectors. If anything, tipping probably lowers wages for non-tipped employees more than the tipped ones. I think the more interesting experiment would be to see how take home pay would be affected in a "tip-only" restaurant. In most, places around the country, the minimum wage for tipped positions is ~$6/hr. Losing that would be like losing one ~$33 table. On the employer's side, they would gain ~$9 back when you account for payroll taxes. I think what we'd see is that most of that wouldn't just be pocketed by the employer, it would probably go back into the restaurant in the form of better ingredients, materials, marketing, and/or additional staff, all in hopes of increasing the number of tables turned overall. Non-luxury restaurant profits are driven by tables turned, not the price of each plate. E.G. hiring an extra busboy or dishwasher might help you turn over more tables more quickly, increasing restaurant profits and also the number of tips earned by the servers. I don't know, this is all an interesting thought experiment. In general, I'm pretty wary of "employers pay workers less by taking advantage of X" arguments. Unless it's poor government policy distorting the labor market or something like a recession, labor markets probably function like any other market. Supply and demand still reigns king. Underpaying employers will have a hard time keeping employees. Highly skilled workers in any sector will sell their talent to the highest bidder.

ThrustVectoring 10y ago

IMO the biggest reason for tipping is tax law. Tips technically have to get accurately reported as income to the IRS, but basically nobody ends up giving Uncle Sam the full amount. Random google searching says that something like 15-20% of cash tips get reported and taxed.

bernardvdw 10y ago

This is 100% inline with what I'm thinking. I am amazed by how many people don't realize that tips are mainly a scheme managed by the employer to guilt-trip the customers into paying an extra mandatory unpredictable amount of money. The thing that makes me so sad about it, is that the waiters are the first ones to guilt-trip the customers, but never the employers. It really hits a nerve when I read those blog posts from ex-waiters, explaining how difficult it is to "live with a waiter wage, so please make sure you tip 25% at least". That attitude is exactly the reason why employers continue to take advantage of employees. I agree that in the current state of things, tips are needed for waiters to survive. But it doesn't make any sense economically. If mandatory minimum wage was set for waiters, and tips were built-in, everyone would be better off.

solidsnack9000 10y ago

Tips avoid taxation, so employees can earn higher wages than they otherwise might, with customers spending less than they otherwise would, and owners paying out less than they otherwise would. Now, tips are not supposed to avoid taxation but it works out that way...