Ending the tip credit brings pay cuts, not raises
Author: Rebekah Paxton
Publication Date: March 2021
Newspaper: Washington Examiner
Here’s a tip that restaurant workers don’t want. The Raise the Wage Act, which will likely return as a standalone bill before Congress, would eliminate the employer credit for tip income and raise the minimum wage for tipped workers to $15 an hour (a 600% increase). But for many restaurant servers and bartenders, this would actually mean taking a pay cut if they aren’t included in the hundreds of thousands of lost jobs. No wonder workers are rejecting Washington’s misguided “help.” It’s a classic case of a law with unintended consequences.
Restaurant servers and bartenders generally support traditional tipping over alternatives because they find it more profitable and flexible. A survey of more than 1,000 restaurant workers found that 97% prefer the traditional tipping method of earning.
According to analysis of Current Population Survey data, when tips are factored in, servers, on average, make $14.32 per hour. Many report that they regularly earn far more: $20 to $30 an hour and beyond. On the off chance an employee doesn’t make at least the minimum wage including tips, their employer is required to make up the difference. Tipped workers are guaranteed to make at least minimum wage but most often make far more thanks to our well-established and culture-supported tipping system.
When mandated pay rates for tipped employees are raised, so are prices. No-tipping policies are often introduced so that restaurants can raise menu prices to cover increased wages but keep customers from experiencing “sticker shock” of dramatically higher meal costs.
Servers’ opposition is understandable, and many have criticized restaurants’ switch to a flat wage system, claiming they earn significantly less when restaurants switch to a model in which base pay is higher but tipping is not expected. Famed New York restaurateur Danny Meyer stated he lost 40% of his “legacy” front-of-house staff when he experimented with a high, flat wage and a no-tipping system.
This phenomenon is confirmed by Census Bureau research, showing consumer awareness of increases in the tipped minimum wage results in a proportional decrease in tip income, which affects workers’ overall earnings. Accordingly, restaurant workers have successfully organized to maintain and restore the tip credit across the country, and they have received strong bipartisan support from lawmakers in places such as Maine, New York, New Mexico, and Washington, D.C.
Now, workers are opposing efforts to eliminate the tip credit nationwide, and rightfully so.
Proponents say this policy is aimed at raising people out of poverty. But it won’t. According to a new study by economists at the University of California, Irvine, tipped employees are 40% less likely to be poor than minimum wage workers, and less than 4% of the total wage effects of eliminating the federal tip credit would go to workers facing extreme poverty.
While eliminating the tip credit won’t solve poverty, economists at Miami and Trinity universities estimate it will kill nearly 700,000 jobs specifically for tipped employees. The nonpartisan Congressional Budget Office recently reported that the Raise the Wage Act will trigger an increase in claims for unemployment insurance and other government assistance programs due to the job losses. Other research suggests expanding policies such as the Earned Income Tax Credit would be better targeted to help poor families.
Labor activists’ campaign against the tip credit only hurts tipped employees, and it flies in the face of employees’ own preferences for their income. Eliminating it would not only be ineffectual in helping those actually experiencing poverty, but it would leave more servers and bartenders out of a job and income during an economic crisis.