Monday, May 16, 2016

The Odd Concept of the Tipped Worker: A Comparative Observation

by Neil H. Buchanan

I am on an extended trip to Australia and New Zealand, where I have been speaking to audiences of various sizes and compositions about the U.S. presidential election.  (Interest is high, to say the least.)  Such a long trip, of course, also allows me to observe various aspects of these other countries' economies.  Although this is my fourth trip to the Antipodes, I am still fascinated by the fact that there are countries in which no workers' livelihoods apparently depend on how much money customers choose to give them in tips.

Taking a step back from the tipping issue, it is still shocking to be reminded that there are people in the United States who work full-time yet who still live in poverty.  That anyone should play by the rules and not be able to live above the poverty level ought to be unthinkable.  If there were to be a sensible explanation to this nonsensical reality, it ought to be that there are some people who are working in jobs where the law permits a base salary below the statutory minimum wage, and that some of those tip-dependent workers do not receive enough money in gratuities to make up the difference.

The full federal minimum wage in the U.S. is $7.25 per hour, where it has been stuck since 2009.  Even though many "blue states" and cities have increased their minimum wages above the federal level in the last few years, even a $10/hour minimum for a worker who is lucky enough to work full time -- yet who almost certainly receives no benefits, most importantly including health insurance -- adds up to a total annual income of roughly  $20,000 per year.  For a single parent trying to raise two children while working full time, that actually falls short of the official (grossly underestimated) government definition of poverty.  Yet under federal law, tipped workers can be paid as little as $2.13 per hour.  Unsurprisingly, the ranks of full-time workers living in poverty are dominated by people who are left to scrounge for tips.

Americans frequently complain about the awkwardness of the tipping process.  We worry about what the "right" tip should be, and most people understand that being a bad tipper is not merely a matter of being a selfish jerk, but it actually violates the social contract that supposedly justifies the sub-minimum wage for tipped workers.  Quentin Tarantino's brilliant breakthrough film "Reservoir Dogs" even includes an extended conversation in which a group of murderers sits around a table in a diner, discussing how much to tip.  Even these amoral characters roundly condemn one of their number who says that waitstaff do not deserve to be tipped.

Is there an alternative?  Of course there is.  In fact, there are several.  Several years ago, the Southeastern Association of Law Schools (SEALS) held its annual meeting at The Breakers, a luxury hotel in Palm Beach, Florida.  Because SEALS holds its conferences in early August, it is able to arrange bargain-basement rates at even the toniest resorts.  This results in the rather amusing sight of decidedly middle-class professors and their families interacting with staff who are accustomed to dealing only with upper-class clients.

There were two memorable aspects to staying at The Breakers.  First, the waitstaff was composed of beautiful young women (and a few beautiful young men) who sounded like Stepford Waitresses.  Dressed in too-short skirts, the servers had been trained to answer every request with the creepily pseudo-seductive statement, "Absolutely, sir!"  (Not coincidentally, Palm Beach is the home to an unrepentant sexist who is running for president on the Republican ticket.)

Second, The Breakers applied an across-the-board 20% tipping rate.  That is, upon computing the total charge for the food and drinks on a particular tab, the computer would add the state and local sales tax as well as a 20% tip.  The menus explicitly stated that this was both the minimum and maximum amount of tipping that was required/allowed.  This meant that the customer need not worry about tipping too much or too little, and it also meant that each customer could simply look at a menu and add 20% to the list price to determine the actual pretax cost of every item.

The behavioral psychology of this system is interesting in its own right, especially because it demonstrates that current U.S. norms do not (at least in the estimation of the highly savvy management of The Breakers) allow restaurants simply to combine the tip with the price.  Recently, some higher-end restaurants in New York City have begun to experiment with no-tipping systems, with mixed results.  Maybe the U.S.'s tipping psychology is so deeply ingrained that the transition to a non-tipping system would be more difficult than one might imagine.

In any case, I can certainly report that it is a relief to know that the prices that I see on menus in Australia and New Zealand actually reflect the prices that I will pay.  (Sales taxes are included in menu prices, too, so the bottom line is not at all a mystery, or an unpleasant surprise at the end of the meal.)  And it is also a relief to know that, even though I do not pay extra, the people serving me my drinks and meals are at least adequately compensated.

Even so, there is a related issue that also deserves to be aired.  The first and only time that I worked as a tipped worker (a job that I eagerly left after two weeks), one of the veteran servers at the restaurant advised me to think of my job as a "small business" within the restaurant.  If I did my job well, I would be paid well.  If not, then I deserved to fail.  This survival-of-the-fittest version of restaurant capitalism was, even in my then-youthful eyes, almost endearing.  That single mother really had no choice but to tell herself that the system was somehow fair, and I did not try to tell her otherwise.

But as a broader policy issue, the question is whether workers must be given a sink-or-swim system of compensation.  The hoary notion of economic incentives, after all, necessarily implies that people will work harder and more effectively if they see extra benefits connected to extra effort.  This was the basis for employee stock-option plans in the 1980's (which often failed), and its intuitive appeal more generally lies behind the foundational idea of upward-sloping supply curves in Econ 101.

The problem is that most jobs, even in the U.S., implicitly reject this logic.  In my profession, for example, there are all kinds of incentives and disincentives, but I would not have followed my current career path if professors' incomes were directly determined by students' tips.  The perverse incentives are simply too obvious.  And most American workers similarly do not live on tips, yet they also do not refuse to work hard.  Even when American workers are threatened with losing paid work days, in fact, it is often difficult to get them to take time off.  This is not to say that they are ignoring incentives, of course, but rather that the crude idea of tipping as the only way to structure incentives is crude indeed.

Traveling abroad provides ample evidence that it is simply not necessary to link service employees' incomes to customers' tips.  As I understand the Australian system, the $17.29/hour minimum wage ($12.60 in U.S. dollars, at current exchange rates) is paid to all workers, including service workers.  There are also "penalty rates," which are essentially wage premia for working overtime and on weekends. That the details of these rules have become an issue in the upcoming Australian elections is not surprising, because the push and pull between workers and employers is inevitably a political as well as an economic issue.

From the standpoint of the U.S., however, the issue is whether we could ever imagine a no-tipping world.  I do not, of course, pretend that my particular experiences are a substitute for systematic evidence, but I can say that there is simply no visible evidence that servers, bartenders, taxi drivers, and so on in Australia and New Zealand work any less diligently than do their counterparts on the other side of the world.

In any cross-national comparison, of course, the ultimate confounding issue is the broad notion of "culture."  Maybe Aussies and Kiwis are simply wired differently from Americans, such that they do not need to be given the direct incentives that Americans require.  Maybe the nice, hard-working people with whom I have interacted extensively for the past several weeks are simply nice, hard-working people.

Again, there is only so much that we can learn from direct experience, but I have almost been happy to note the few times when I have interacted with sullen, slow, and inattentive servers.  Those anti-model employees are exactly as unpleasant as the bad employees that I have encountered in the United States, apparently neither more nor less unpleasant in response to the incentives of being paid by the hour than if they had to suck up to paying customers.

If I had never met a bad server on this side of the world, after all, I would have been forced to consider the possibility that workers here are inherently nice, and that the non-tipping system was simply not enough to cause them to be bad workers, no matter the economic incentives.  That is still possible, I suppose, but it is much more difficult to take seriously in light of the evidence.  Instead, it appears that it is no more necessary to dangle possible tips in front of waiters and waitresses than it is to pay bus drivers, accountants, or construction workers based on immediate customer response.

As an aside, there is also something pleasant about a system that does not amplify the sexist aspects of the customer/server relationship.  Even without the disturbing Trump-iness of the system at places like The Breakers, the economic dynamic between male customers and female servers plays off of the idea that a woman's "attentions" can be purchased for the right price.  Countless movies and TV shows have played off of this idea, usually for comic effect, but never without taking the sense of something unsavory out of play.  I am long since past the age when I flirted with waitresses, but I certainly remember the days when the act of tipping was not merely a matter of calculating the value of the immediate service provided.  No server (or customer) should have to navigate such ugly terrain.  (And I will not even begin to discuss the racial factors that come into play in tipped occupations.)

In any event, although it would certainly require a difficult transition period, it seems clear that the U.S. should move toward the tip-free systems that I have seen in Australia and New Zealand, for the good of workers, customers, and employers.