Tipped Employees Are Not “Stuck” at $2.13

“Waitresses stuck at $2.13 hourly minimum for 22 years.”

This was the headline of a Bloomberg article describing the debate over the base wage for tipped employees. The labor union-founded Restaurant Opportunities Center has similarly promoted the idea that employees who receive tip income have been “stuck at $2.13/hr for 22 years.” This narrative is being promoted in a series of media events on February 13th, and Sen. Sherrod Brown (D-OH) has even pledged to put forth a resolution in recognition of the day.

It’s an eye-catching claim, but it doesn’t stand up to scrutiny. A recent Employment Policies Institute analysis of Census Bureau data finds that tipped restaurant employees have seen their take-home pay rise in almost every year between 1994 and 2011–even in states where the $2.13 federal tipped wage didn’t change. These employees average more than $13 an hour with tip income included.

EPI used Census Bureau Current Population Survey data to analyze tipped employee earnings in the 19 states where the cash wage has been equal to the federal level of $2.13 between 1994 and 2011. These are the states where, if activists are to be believed, the numbers should show that tipped restaurant employees face stagnant pay.

But the numbers show just the opposite. On a nominal basis, the take-home pay for tipped restaurant employees has risen by almost 70 percent over this 18-year time period. Take-home pay averaged $13.13 an hour (with tip income included) in 2011. Even adjusted for inflation, the figures look promising: The $7.79 take-home wage in 1994 was worth $11.82 in 2011 dollars, which translates to 11 percent real wage growth over this time period.

In other words, not only have earnings for tipped employees not been “stagnant”—they’ve actually kept up with inflation (and even exceeded it) over the last two decades.

It make sense: Because restaurant menu prices rise slightly in most years to account for inflation, tipped restaurant employees have an automatic escalator built in to their hourly take-home pay. As the check total rises, tip income rises along with it. (Census data show that top earners in the restaurant industry collect $24 an hour or more when tip income is included.)

These numbers show that the status quo for tipped employees is actually quite good—even in states where the base wage has been unchanged over the last 20 years. It’s worth keeping this in mind, especially in light of economic evidence that shows raising the tipped wage can have a negative effect on the opportunities available to earn tip income.



NYT Misses the Mark on the Tipped Wage

Last weekend, the New York Times editorial board endorsed a 232 percent increase in the base wage for tipped employees. It’s an unnecessary policy change that will harm the same tipped employees it’s meant to help.

Here are the facts. According to recent Census Bureau data, the average hourly wage for a restaurant employee earning tip income is above $13 an hour. Top earners can collect $24 an hour or more. This same data set shows that tipped employees have seen a nearly 60 percent increase in their hourly earnings over the last 20 years.

The Times attempts to support its argument by praising some states, like Washington, that don’t allow a tip credit as proof. This also ignores the evidence: Seattle Weekly reports that restaurants in the state skimp on service as a consequence, dropping bussers and assigning larger table sections.

And nationally, table-service restaurants are experimenting with computer terminals that allow customers to order and pay at the table. A job that pays a server $12 an hour when tips are included won’t be nearly as lucrative when all the server is doing is carrying food to the table.

These real-life consequences of wage hikes are consistent with research forthcoming in the Southern Economic Journal, which finds that increasing the tipped wage reduces full-service restaurant employment. Next time, hopefully the Times editorial board will think twice before it advocates for such a misguided policy.

An Unproductive Argument for Raising the Minimum Wage

Does a bad idea become a good one when you pair it with a fancy chart? The labor-backed Economic Policy Institute (EcPI) seems to think so. Recently, it rehashed the discredited idea of a minimum wage tied to economy-wide productivity, complete with a fancy chart to make the concept seem rational.  But it’s a comparison that makes zero economic sense, and only demonstrates how far labor-backed groups like EcPI will go in their quest to make new labor-cost mandates seem like a good thing.

Consider the red line in the chart below, which tracks gains in economic productivity over the last 20 years. This includes dramatic gains in technology-related industries like computers, software design, and telecommunications. (Think of the computer or cell phone you used 15 years ago versus the one you use today.) But the chart also shows that the productivity gains in an industry that actually hires people at the minimum wage (e.g. the food service industry) look far different. On net, productivity has increased just seven percent in the industry over the last 20 years. It’s not surprising: You can only bus a table, cook a hamburger, or serve a meal so fast.

Productivity Comparison Graph

What happens when mandated wages outstrip the value that  employees provide? One option is to increase prices. But especially in a tight economy, higher prices can mean lower sales. Instead, employers have to provide the same product in a less costly manner—in other words, with less service. At a restaurant, that might mean your server busses your table instead of a bus boy, or it could mean placing your order via a touchscreen computer rather than with a person.

The food industry will adjust to higher mandated labor costs if forced. But those adjustments mean fewer jobs for the very people earning an entry-level wage. To learn more about the flaws with linking the minimum wage to productivity or inflation, click here to read a recent Wall Street Journal op-ed. 

Newsflash: Entry-Level Jobs pay Entry-Level Wages

In conjunction with recent protests for a $15 minimum wage in the fast food industry, activist groups blogged and tweeted that “7 out of the top 10 lowest paying jobs” are in the food and hospitality industry. It’s far less shocking than it sounds.

Census Bureau data show that this industry is the largest employer of entry-level employees (defined as 16-24 year-olds without a high school diploma). One-third of the country’s entry-level employees receive their paycheck from a food or hospitality employer—no other industry comes close. Regarding restaurants specifically—which were the subject of so much ire in the weeks’ protests–five of the ten most popular entry-level occupations are food-service jobs.

130411_MinWage_TopTenEntryLevelJobs_2 (4)

Think of it this way: What if someone told you that the bulk of the country’s lower-paying jobs are concentrated in the same industry that the bulk of Americans receive early work experience? You’d probably say, “Duh!” These employees start at the bottom of the wage scale because they’re starting at the bottom of the career ladder. But they’re not stuck there: Two-thirds receive a raise in 1-12 months on the job.

Of course, you need job experience to receive a raise, and you can’t get experience without a job. Yet that’s exactly what will happen if the activists who misuse this information get their way on a $15 minimum wage.

Celebrity Chef: Keep Restaurant Labor Costs in Check, or Fail

In an episode of the Food Network’s TV show “Restaurant Impossible,” celebrity chef Robert Irvine visits a failing Mexican restaurant in New Hampshire. Irvine’s task is to advise the owners on how to better manage their restaurant to prevent it from going out of business. Upon inspection of the restaurant’s books, Irvine informed the owners that they “employ too many people who work too many hours” and there is “no way [the owners] could ever make a profit.”

It’s a concern not limited to this one restaurant. Labor costs consume roughly one-third of each sales dollar at restaurants. After accounting for other expenses, they’re typically left with three cents in profit per each sales dollar. Even a small fluctuation in labor costs can have a dramatic effect on a restaurant’s profitability—and thus its ability to expand, hire more employees, or even keep the employees it currently has.

It’s a lesson our elected representatives in Washington and elsewhere would do well to remember. Unfortunately, Irvine has a much better grasp on this simple business concept than some legislators, who seem to think that the restaurant industry can absorb as much as a 240 percent increase in the base wage paid to tipped employees (who already make an average of $13 an hour with tip income included).

Lawmakers who implement such minimum wage hikes force their hometown restaurants to either raise prices, or – if higher prices will mean decreased sales – provide the same product with less service.

As Irvine and his guests would surely understand, running a restaurant is hard enough as it is without contending with onerous government wage mandates.

Study Finds Reducing Tip Credits Means Fewer Hours for Tipped Employees

This study, from economists at Miami and Trinity Universities, uses two different government datasets to examine the impact of states reducing or eliminating their tip credit—a part of labor law that allows tipped employees to be paid a lower cash wage as long as they earn at least the minimum when tips are included.  Restaurants, which only keep about 3 cents in profit for each dollar in revenue, are faced with difficult choices when labor cost rises and the increases can’t be passed on to customers averse to higher prices. The authors find that each 10 percent increase in the base wage a tipped employee must be paid reduces their hours worked by about five percent, as restaurants either reduce the number of servers per shift or move toward customer self-service (i.e. technology that lets you pay at the table).

Read More: Tip Credits and Employment in the U.S Restaurant Industry