Here’s a tip: Leave the R.I. tipped wage alone

Original Article:

  • Author: Michael Saltsman

  • Publication Date: March 2015

  • Newspaper: The Providence Journal

  • Topics: Tipped Wage

Employees at Rhode Island’s world-famous restaurants may have been too busy gearing up for the start of tourist season to notice legislation heard this month by the House Committee on Labor that could put their tip income — and their job — at risk. State Rep. Aaron Regunberg, D-Providence, and his allies in the state’s powerful labor unions have proposed the drastic and dangerous step of increasing the state’s minimum wage for tipped employees by 211 percent.

Here is a quick background for readers not schooled in the basics of the restaurant industry. All employees — both tipped and non-tipped alike — must be paid the state minimum wage of $9 an hour. Currently, Rhode Island follows the Internal Revenue Service and the vast majority of states in treating tips as income earned on the job. Accordingly, tips are counted as income in satisfying the state’s required hourly wage.

If the employee doesn’t hit the $9 figure with his or her $2.89 base pay and tips combined, employers are required to make up the difference. Data from the Census Bureau suggests that typically this isn’t a problem: Rhode Island’s tipped employees self-report an average wage of $12.12 an hour, 35 percent more than the current state minimum wage.

But raising the base wage for tipped employees is not just unnecessary; a new analysis by economists William Even of Miami University and David Macpherson of Trinity University suggests that it could also be detrimental.

A handful of other states have taken the dramatic step of disregarding tip income in satisfying the minimum wage law. Even and Macpherson studied their experiences (as well as the experiences of other states) over two decades, in a recent study published in the Southern Economic Journal. They found a clear relationship between increases in the tipped minimum wage and decreases in full-service restaurant employment.

Applying their analysis to Rhode Island, the economists estimate that eliminating the tipped wage could reduce the state’s full-service restaurant employment by up to 16.9 percent, or up to 3,400 jobs. Servers, bartenders, and hostesses would bear the brunt of this job loss, say the economists.

You don’t need a Ph.D. in economics to understand why. Full-service restaurants operate on very thin profit margins, keeping roughly 3 cents in profit for each dollar in sales. The 211 percent base wage increase being proposed in Rhode Island means that restaurants must either cut costs or raise prices to stay in business.

Raising prices often isn’t an option. Just ask restaurant operators in Oakland, Calif.: Facing a 36 percent increase in their own minimum wage that took effect at the beginning of this month, prices have increased by as much as 20 percent. The San Francisco Chronicle reports that “ the city’s top restaurateurs fear they will lose customers due to higher prices.”

The other option for restaurateurs, unfortunately, is even worse: Reducing job opportunities, cutting hours and laying off employees. These aren’t jobs that Rhode Island can afford to lose. The unemployment rate for young adults in the state remains at 19 percent, and restaurants provide job experience and — as the Census Bureau data shows — fair compensation.

Proponents have suggested that relatively higher poverty rates among tipped employees support their case. But here, too, Census Bureau data is instructive: An analysis from the aforementioned economists shows that differences in poverty rates between tipped and non-tipped employees are mostly due to demographic factors like age and education — not their receipt of tips.

Despite the doom-and-gloom rhetoric from proponents of Representative Regunberg’s bill, tipped employees prefer the status quo: A Google survey of roughly 5,000 people who report earning tip income found that nearly 70 percent of them wouldn’t favor even a $15 minimum wage if it upset the tipping status quo.

The message for Rhode Island legislators is that they should handle this misguided proposal like they’d handle an overcooked meal: Send it back.