Thoughts On Tipping

Interesting legal maneuvering has been going on in Michigan over something called the tip credit. It began with a ballot initiative that was challenged but upheld in court, but later was taken off the ballot after it was passed by the legislature instead.

Formerly, restaurants that employ servers, bartenders or delivery drivers were “obliged to pay those staff members only $3.52 an hour if the employees take in the rest of the minimum wage they’re due in tips.” Since the minimum wage was $9.25 per hour, if they received at least $5.73 an hour in tips, the restaurants did not owe them any further pay.

Under the new law, minimum wage would increase in annual increments to $12 an hour over the next three years, and the tip credit would be phased out. This is a big victory for labor advocacy groups, but the Michigan Restaurant Association (MRA) fears that it will drive up a full-service restaurant’s labor costs by 241% for their tipped employees. A survey of members by the MRA found that many restaurant owners plan to deal with this with a combination of cutting jobs and raising menu prices.

Despite the 30% increase from $9.25 to $12.00 per hour, it seems that the restaurant association could cope by adopting the European model where tipping is less common. Rick Steves, the travel guy, points out that “tipping in Europe isn't as automatic nor as generous as it is in the United States, and in many countries, they're not expected at all.” Often service is included in the bill, as it is in the US when serving large groups. According to this website, the default tip in the US should be 20%. Following this service-included philosophy, the restaurants could remain whole by gradually raising menu prices by only 10% and eliminating tips.

Note: A no-tipping policy would also eliminate a lot of intricate paperwork for the owners as the tip credit is phased out. It would also move the responsibility of training, rewarding and disciplining wait-staff from the customers to management where it belongs.

Surprisingly, the fear of this very thing, undermining the “existing tipping culture,” motivated many tipped workers in Michigan to organize a protest at the state capital earlier this year. They were very concerned that proposed changes would actually decrease their income. So those well meaning (out-or-state) labor advocates should have consulted with the Michigan restaurant workers that they were trying to protect before pressing for the changes.

One thing is for sure, when outside forces, either lawmakers or advocates or as in this case both, feel the need to tinker with an economic system; there will be unintended consequences. Enforced wage increases, unrelated to normal supply and demand, pushes up prices and may cost jobs. That’s economic understanding.

Side comment: For similar well meaning reasons, some people on social media have been speaking out against self-service checkouts at grocery stores, saying that they are taking away jobs. Last week my grocery store had signs posted at the self-service stations encouraging customers to apply for cashier jobs. Apparently with the current labor shortage, they can’t find enough cashiers and figure that people who have already been checking themselves out have acquired some of the skills needed!