The Folly of a 127-Percent Maryland Tipped Wage Hike

This spring, Maryland legislators will consider Senate Bill 569, which would increase the state’s minimum wage for tipped employees by 127 percent—overnight.

This isn’t a fight about whether employees who earn tips should be covered by the state’s minimum wage law: They already are, and they’re guaranteed at least $8 an hour, the same as everyone else.

In fact, these aren’t minimum wage employees at all: Census Bureau data shows that tipped employees in Maryland self-report an average wage of over $14 an hour—76 percent more than the state’s minimum wage.

What this policy fight is about is what happens when a state makes the radical decision to no longer consider tips as income earned on the job. The IRS doesn’t believe it, and either does the state’s comptroller. But seven states have decided to set the tipped minimum wage equal to the full minimum wage, and we have plenty of evidence to evaluate the merits.

In a study published in the Southern Economic Journal, economists studied two decades of data on states raising their tipped minimum wages, and found clear evidence of a reduction in full-service restaurant employment following the policy change. You can see this impact in cities like Seattle, where restaurants stopped hiring bus boys, and staffed fewer servers per shift.

Of course, some proponents argue that legal changes like this have no consequences. But not even their supporters believe this. For instance, in a 2013 interview with MSNBC, celebrity chef Tom Colicchio—deemed a “high road” employer by one the most vocal advocacy groups on this issue—explained that restaurant prices would have to rise by a staggering 25-30% if the tipped wage was set equal to the minimum wage.

Right now in Oakland, CA, an overnight 36 percent minimum wage increase—in an environment where the tip credit has already been eliminated—forced some restaurants to raise prices by as much as 20 percent, caused others to eliminate tipping, and even contributed to the closure of four restaurants in the city’s Chinatown area. Across the Bay in San Francisco, one of that city’s top 100 restaurants closed in February—again, due in part to a coming wage increase that’s happened in an environment with no tip credit.

Both the data and the anecdotal evidence show that a tipped wage increase is a bad idea. This bill is a solution in search of a problem–and Maryland won’t have a problem until it decides to raise the tipped wage by 127 percent.

 

New Analysis: 80 Percent Tipped Wage Hike in New York to Cost Thousands of Jobs

When New York legislators passed an increase in the state’s minimum wage in 2013, they demurred on whether to increase the tipped minimum wage. A three-member Wage Board was appointed by Governor Andrew Cuomo earlier this year to consider this question, and the board is now touring the state to collect feedback on whether the base wage for employees who earn tip income should be increased.

Labor union-backed organizations such as the National Employment Law Project (NELP) have called for a tipped wage increase of up to 80 percent, and argue that it can be accomplished with little or no consequence for the restaurant industry and the people they employ. However, peer-reviewed research published in the Southern Economic Journal reaches a very different conclusion: Over the last two decades, Census Bureau data shows that increases in the tipped minimum wage have reduced employment in the full-service restaurant industry.

The authors of that study, economists from Miami and Trinity Universities, used their results as a framework to analyze NELP’s proposed 80 percent wage hike for tipped employees in New York. The write-up of their analysis is available here. In short, the economists find that between 7,400 and 19,700 restaurant industry jobs would be eliminated as a consequence of this wage mandate. They further specify that “the bulk of this job loss will be borne by the tipped workers in the industry – i.e., servers, bartenders, and attendants.”

You can learn more about how much much tipped employees earn, and why an increase in the tipped minimum wage means fewer jobs for tipped employees. 

New Commercial: Tipped Employees Speak Out Against Changing the Status Quo

Proponents of a 232 percent increase in the tipped minimum wage claim to have employees’ best interests in mind. But what if employees don’t want the “change” they’re offering?

A new television commercial features three restaurant servers from the Washington, DC, metropolitan area who oppose a dramatic tipped wage hike. All three earn more than $20 an hour in tips on average–and all three are concerned that a tipped wage hike could reduce opportunities in an industry they enjoy working in.

These three employees aren’t isolated in their opinions: In a recent Google Consumer Survey of 5,000 people who reported working in a restaurant and earning tip income, nearly 70 percent reported that they’d oppose even a $15 minimum wage if it upset the tipping status quo.

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It’s not just the employees who oppose these changes–customers dislike them, too. We used Google Consumer Survey to ask 500 people if they’d support a new compensation system at restaurants where their meal was more expensive but they weren’t expected to tip. (This is one of a few likely consequences should the tipped wage be increased.) Over 80 percent said they preferred the status quo.

To recap: Employees don’t want the change or need the change, and neither do customers. Why are we talking about this again?

 

Washington Post Ad: Don’t Erase Tipped Employees’ Jobs

There’s nothing modest about a 232 percent increase in the tipped minimum wage, and the consequences for employees would be severe. That’s the message of a new ad in the Washington Post, which warns policymakers: Don’t Erase My Job — Or My Tips.

Download a copy of the ad here.

The ad emphasizes a message we’ve used before: Tipped employees already report earning over $13 an hour, and they’ve received a bump in pay almost every year over the last two decades. The ad also references economic research published in the Southern Economic Journal, which finds that employment falls in the full service restaurant industry after the tipped wage rises.

But it’s not just jobs that disappear: Tip income could disappear as well.

As labor costs have increased, some restaurants have opted to eliminate tipping in favor of higher prices and a fixed hourly wage, removing employees’ ability to earn hourly wages as high as $24/hour or more.

In a recent Google Consumer Survey, EPI asked roughly 10,000 people the following question: “If you work in a restaurant & earn tips, would you support a $15 minimum wage if it meant you could no longer receive those tips?” Of those who reported that they did work in a restaurant and earn tips, nearly 70 percent opted for the current tipping system instead of a $15 base wage that put their tips at risk.

Lost jobs, and less income—that’s the cost of a 232 percent tipped wage hike.

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Full-Page Ads in DC Debunk Common Myths on the Tipped Wage

On Thursday, April 30th, the US Senate is expected to vote on a bill to increase the federal minimum wage by 40 percent to $10.10 an hour and increase the tipped minimum wage by 232 percent to $7.07 an hour. Labor union-backed advocacy groups have been repeating the myth that some tipped employees are “stuck” earning wages below the  federal minimum.

In full-page advertisements in Politico, Roll Call, and The Hill, the Employment Policies Institute is debunking this myth. Not only do tipped employees earn at least the federal minimum in take-home pay–they average over $13 an hour in total compensation. Top earners bring in $25 an hour or more.

See our ad here, and read more about the compensation of tipped employees.

WSJ Ad: How Much Do Tipped Employees Really Make?

In the DC edition of today’s Wall Street Journal, our full-page ad brings some important data to bear on the debate over the tipped minimum wage. While the White House and its allies in Congress make misleading claims about employees being “stuck” at a wage below the federal minimum, data from the Census Bureau tell a very different story. Even in states where the tipped minimum wage is set equal to the federal minimum wage, tipped employees report over $13 an hour in total compensation. Top earners bring in $25 an hour or more.

You can download a copy of our ad here. You can also read more about tipped employees and total compensation.

Union Front Group Needs a Lesson in Basic Statistics

Anyone who’s taken an entry-level course in statistics has heard this phrase: “Correlation does not mean causation.” For instance, Americans might be drinking more diet soda and buying more cars, but that doesn’t mean that one trend has caused the other. It’s a lesson that the Restaurant Opportunities Center (ROC)–a union-founded activist group–should have reviewed before releasing its latest report on the tipped minimum wage.

ROC’s report claims that states with a higher tipped minimum wage have higher restaurant sales per person than the rest of the US–and that eliminating the tip credit is thus a “recipe for success.” But not only does ROC fail to prove that tip credit levels are a major driver of restaurant sales—its numbers actually make the opposite case.

ROC offers up this graph to support its argument:

 

For readers who aren’t steeped in statistical jargon, the small letter r at the bottom of the graph represents the strength of the correlation. For instance, an value greater than 0.7 would represent a strong positive correlation. In this case, ROC is reporting a negative r value, suggesting that sales decrease as the tipped minimum wage rises. This is obviously a typo on ROC’s part, reflecting an embarrassing lack of attention to detail.

Still, that leaves open the question of whether ROC’s big headline on the tipped wage is actually backed up by its data. All of the numbers ROC used are available from the Census Bureau and the Restaurant Association, so EPI pulled data from 2013 together to check ROC’s claim. No surprise: Comparing tipped minimum wages and restaurant sales yields an r value of only 0.2, which equates to a negligible or weak correlation.

In other words, ROC is wrong – it’s not true that sales will necessarily increase as the tipped wage increases.

This is consistent with both common sense and with the academic research on the tipped wage. To the extent that any relationship exists between a higher tipped wage and restaurant sales, it’s most likely due to employers in high-cost states passing along their increased costs through higher prices. But higher prices can also mean fewer sales, which is why employers will avoid price increases if possible — and why the relationship between a higher tipped wage and restaurant sales is weak. Instead, the research shows employers are forced to reduce employee hours and staffing levels to adapt to the increase in labor costs. That might keep prices steady, but it also means fewer highly-paid tipped jobs are available.

ROC might not have intended to, but if anything this new paper disproves its weak argument in favor of a higher tipped wage. This is the same group, of course, that tells others how to run their businesses but couldn’t make its own restaurant successful. Maybe ROC’s operations management is the same group that did the research for this report.