Over at the National Center for Policy Analysis, Richard McKenzie has studied the “economics of tipping.” In his report, McKenzie found that, as with many studies, the terminology invoked by those on the political Left muddies the waters. For example, a “median salary” differs from an “average salary” and this distinction alters the interpretation of the data significantly, especially if one considers wage plus tips received.
- Servers’ attitudes toward tipping. A survey of 40 servers in moderately priced sit-down restaurants found that if servers were to forgo their tips, they reported requiring an hourly wage ranging from $18 to $50, with a median hourly rate of $30. Every server noted that if tipping was replaced by a fixed hourly rate of pay, service would suffer significantly, at least on average.
- Restaurants’ experience with no-tipping policies. In 2015, some companies adopted no-tipping policies. That required increasing employee wages to wait staff as well as kitchen staffers, increasing menu prices ~20% overall. Within 10 months, restaurants lost 70% of their servers. Why? Servers experienced an hourly wage drop from a range of $35-$45 to $20-$35 (or, ~57% on average).
- The principal/agent problem. When management understands the business—the macro level—but not its delivery—the micro level—the “principal/agent” problem can emerge. This is situation where those who deliver the goods or services possess knowledge about demographics at the customer level—what does/doesn’t sell, trends, fads—and that knowledge doesn’t get factored into management decisions.
Tipping is a pay mechanism that incentivizes servers to use their localized information for their own and their company’s benefit. Tipping aligns the incentives of servers and managers and owners for a common objective—to make people’s restaurant experiences a win for everyone. Through tipping, servers effectively become commissioned salespeople, enticed to add to customers’ experience and company sales.
In the absense of facts and reason, ideas like this end up hurting the economy, businesses, and the very people those ideas were intended to benefit.
Let the discussion begin…
To read Richard McKenzie's report, click on the following data