Last year, Chicago started eliminating its tipped wage system for restaurant servers and bartenders. Early evidence shows the result has been lost jobs, a rise in service fees and restaurant closures.
Now, activist group One Fair Wage wants to expand Chicago’s failed experiment to the rest of Illinois.
State law currently requires all employees to earn a minimum of $15 per hour. For tipped restaurant workers across the state, this can be fulfilled with a $9 hourly cash wage paid by the restaurant employer as long as tips make up the difference between that and the $15 hourly requirement. This difference is called a “tip credit.”
Local tipped workers report earning far more than this minimum wage in Illinois restaurants. The large majority say they earn at least $20 per hour through their tips, with some earning as much as $40 per hour, according to a survey of nearly 300 local workers.
This is similar to the system employees thrived under in Chicago before groups like One Fair Wage came on the scene. It promised eliminating the tip credit would increase wages with tips on top. Instead, less than a year in, employees have lost their jobs and restaurants are shutting down.
Last summer, Chicago started eliminating the tip credit by raising the base tipped wage from $9.48 up to $11.02 per hour. Restaurants have razor-thin profit margins, and operators immediately faced the difficult decision of whether to pass on costs to their customers or start downsizing. Local residents have tracked over 150 Chicago restaurants that have added new service fees since the law began moving through the City Council.
In some cases, these adjustments aren’t enough. Some laid off staff entirely or shut down for good.
Quarterly data from the Bureau of Labor Statistics shows Chicago’s restaurants have lost over 5,000 full-service restaurant jobs since the law went into effect.
Unfortunately, this should come as no surprise. When restaurants raise prices or add service charges, customers feel the pinch and choose to dine out less frequently. This hurts both operators and their employees. When tipped wage rates are increased, one Cornell University researcher found, tip percentages left by customers fall. As a result, University of California-Irvine economists found, tipped workers’ earnings decline.
It’s no shock that rising costs and fewer diners has become unsustainable for many establishments. As researchers from Harvard Business School found, this is a recipe for restaurant closures. It’s also Chicago’s new reality: Dozens of restaurants have closed in the last six months, including local favorite Revolution Brewing’s brewpub and award-winning “legend” Arun’s.
On top of the evidence that this system isn’t working for restaurants or their customers, it’s also highly unpopular with actual tipped workers. In fact, 87% of surveyed local workers support the current tip credit system and do not want to see it changed to the One Fair Wage alternative.
One Fair Wage’s promises have failed to deliver across the country, including states like California, where tipping percentages are lowest in the nation. Many states have rejected this policy after hearing from tipped workers, including most recently in Massachusetts. Lawmakers should heed the warning signs in Chicago and listen to tipped workers.