In recent years, labor activists have invested considerable financial resources in campaigns to eliminate what’s known as the tip credit.

The tip credit represents the difference between a set base hourly wage for restaurant employees who regularly earn substantial tips, and the regular minimum wage rate. This difference counts regular tip income toward the minimum wage requirement. Legally, the Fair Labor Standards Act (FLSA) and other state and local laws protect tipped employees: if they do not earn enough tips to put them at the regular hourly minimum wage rate, employers must make up the difference. The tip credit allows tips to count toward the regular minimum wage requirement, but all tipped restaurant employees are legally ensured to earn at least that base rate.

Restaurants, which employ most tipped workers, operate on characteristically minimal profit margins – as low as 3%. By counting tips toward the minimum wage, restaurants can offer tipped customer service positions while also providing competitive wages for non-service employees including kitchen staff. At the same time, tipped employees typically earn far more than the minimum wage rate, estimated at $27 per hour on average.

Yet activists outside of the industry and not connected to tipped employees argue upending this earnings system will target alleged discrimination or inequity. For instance, Saru Jayaraman, president of One Fair Wage, testified that “ending the subminimum wage...improves all these concerns,” and her organization One Fair Wage claims eliminating tip credits is “a gender and racial equity cornerstone for restaurant workers.” The Center for American Progress claims that “ending the tipped minimum wage will reduce poverty and inequality.” The National Employment Law Project argues eliminating tip credits “would take steps toward a more equitable and fair society.”

The latest research by Dr. David Neumark and Emma Wohl of the University of California Irvine adds to existing research surrounding the impacts of tip credit elimination policy.

Contrary to activist arguments, eliminating the tip credit does not have any discernable impact on eliminating earnings gaps between minority, female, and White male employees. Their study of federal Census Bureau data over two decades finds:

• Tipped minimum wage hikes have not increased total weekly earnings for women or minority tipped employees.
• In fact, tipped wage hikes are shown to increase the hourly wage gaps for minority tipped employees without increasing weekly earnings for these employees.
• Should policymakers increase the overall minimum wage, keeping tip credits intact is statistically more efficient at raising wages and reducing earnings gaps for tipped employees.

On the contrary, previous economic research spanning decades finds existing schemes to compromise tip credits have resulted in fewer jobs for tipped employees and reduced overall earnings. Additional research finds this also results in closed restaurants.

Neumark and Wohl’s research contributes to a growing body of research that eliminating tip credits fails to deliver intended wage boosts, and in various ways could leave employees worse off than before. While there may be other factors and bad actors at play in the dynamics of the restaurant industry, eliminating the tip credit does not change these factors and in fact stands to hurt employees and restaurants by taking away jobs and earnings.