New Study: Reducing Tip Credit Kills Opportunities for Waiters and Waitresses
Research Finds Nearly 300,000 Full-Time Equivalent Jobs Would Be Lost With Federal Proposal
Publication Date: November 2011
Topics: Minimum Wage
Today, the Employment Policies Institute (EPI) released a new study by economists William E. Even of Miami University and David A. Macpherson of Trinity University that examines the consequences for waiters, waitresses, and other tipped employees of reducing the “tip credit.”
The tip credit is a labor law provision that allows employers of tipped employees to pay a cash wage of $2.13 an hour, so long as the employee earns at least the federal minimum wage of $7.25 when tips are included. An analysis of Bureau of Labor Statistics data shows the average hourly wage for tipped employees in the restaurant industry, with tips included, is $10.95.
Thirty states and the District of Columbia require a cash wage higher than the federal. Drs. Even and Macpherson examine 20 years of data from two government datasets to explore whether there are consequences for restaurant employees following an increase in the cash wage (and thus a reduction in or elimination of the tip credit). They also estimate the impact of the WAGES Act currently before Congress (which would reduce the federal tip credit), and the impact of a series of state bills and initiatives currently being considered.
The authors find that each 10 percent increase in the cash wage reduces hours worked by tipped employees, such as servers and bartenders, by more than 5 percent. Further, they estimate that the WAGES Act, which would raise the federal cash wage to $5 an hour, would result in the loss of nearly 12 million hours of work for tipped employees—the equivalent of about 300,000 full-time tipped jobs.
“Restaurants only keep about 3 cents for each dollar in food sales, and every increase in labor costs has to be offset elsewhere when cost-conscious customers aren’t willing to pay higher prices,” said Michael Saltsman, research fellow at the Employment Policies Institute. “This study shows how those offsets translate to fewer hours and fewer jobs for tipped employees.”
A chart with state-specific employment impacts and a policy brief summarizing all of the study’s key findings is available here.
“Americans will be eating away from home in large numbers in the next few months, and recent polling data show that the vast majority tip 15 percent of the check or more for good service,” Saltsman continued. “These gratuities are what allow hard-working waiters and waitresses to earn an hourly wage that’s well above the minimum—nearly $11 an hour.”
Saltsman concluded: “This new research confirms that attempts to increase the cash wage and reduce the tip credit aren’t only unnecessary, they’re harmful.”