Understanding Tipping in the US
I came across this article about how people are getting frustrated with tipping as they feel like they are getting excessively asked for tips in every kind of establishment. The result has been a general reduction in tipping across the country, and I ended up striving to understand the tipping concept better.
A summary of the reasons
- The value in tipping is supposed to recognise excellent service, but now it’s popping up everywhere and losing it’s principle
- US economy’s increasing reliance on tips; companies dumping the responsibility for employee pay onto the customer
Asking for tips hence allows employers to increase worker pay without increasing wages. The increased reliance on tipping also got triggered by the pandemic when customers were tipping to acknowledge workers putting themselves at risk, causing businesses to become dependent on the practice.
Looking into wages and tips
It’s easy to see why companies don’t want to have to increase wages, given the US minimum wage is $2.13 for tipped workers (aka sub-minimum wage) and $7.25 for un-tipped workers, with companies having to compensate any tipped worker who doesn’t manage to hit the $7.25 mark.
This caused another source of confusion, as another WSJ article stated that the Chicago minimum wage was $15.80. It is hence important to note that while the federal minimum wage must be applied in all states, states are allowed to set their own minimum wages above the federal amounts if they wish. Hence, the Chicago minimum wage is $15.80 and the sub-minimum wage is $9.48.
I always lived under the impression that US service workers live off tips and they need it for their livelihood. This isn’t exactly true as an un-tipped worker will make enough to get by (according to the Fed), but it’s also not totally false as they will indeed earn more with more tips since it does go straight into their pocket.
However, the two-tiered wage system causes other problems as well:
- Leaves employees vulnerable to exploitation by employers who may improperly calculate the wages owed
- Demographic factors (discrimination) can have a significant impact on a service worker’s earning
- Undue pressure on workers to go beyond the scope of their job to earn a liveable wage
Going forward
There is thus a lot of warranted discussion about abolishing the sub-minimum wage completely, and Chicago became one of the largest cities recently to commit to removing the sub-minimum wage by 2028 in gradual steps. However, the impact of this would be that since employers now have to shoulder a larger proportion of employee wages, these would translate to higher prices for customers as well.
This theoretically makes sense as in the end, customers are still the ones providing the money required to enable workers to earn sufficient wages. This increased transparency in the pricing is appreciated by many customers’ as they don’t have to concern themselves with tip amounts as they know the workers will be paid sufficiently. However, the adverse effect is that transparent pricing (which in this case means higher prices) can easily scare off customers and be bad for business; any competing establishment can choose not to enforce this transparent technique, keep prices low and require tipping, and hence give the illusion of cheaper products to attract customers.
This illustrates the incredibly delicate balance that companies have to strike between employees wages and their pricing, as there is no straightforward solution. The other important point is that when companies do decide to price their services transparently, it is paramount to highlight that no further tipping is expected, helping customers be aware that the price stated is the full cost of the service. Another approach applied by some establishments is to maintain the food prices, but have a specified tip rate (on a menu), which also achieves the goal of letting the customer know the true cost of dining out without scaring away customers with high prices. There have been positive effects using these approaches, but there still remains a lot to figure out.
You can now use this information to correct the next friend that tells you that US service workers solely live off tips
Original article: https://www.wsj.com/lifestyle/tipping-down-service-workers-a4c27a2e?mod=WTRN_pos7&cx_testId=3&cx_testVariant=cx_164&cx_artPos=6
More information:
America’s Fight Over Tipping at Restaurants Comes to Its Biggest Battleground Yet
Why Businesses Can’t Stop Asking for Tips
Chicago’s minimum wage, as result of the Minimum Wage Ordinance
Ending US Subminimum Tipped Wages can Reduce Poverty and Inequality
