Consequences of a Tipped Wage Increase

How do Tipped Employers Respond to Tipped Wage Increases?

Restaurants are the primary employers of tipped employees and are especially sensitive to increases in labor costs. According to the 2010 Restaurant Industry Operations Report, labor costs consume approximately one-third of the industry’s total revenue—a disproportionately high share. After expenses, the typical restaurant keeps roughly three cents of each food sales dollar, and as a result can’t simply absorb an increase in labor costs. Since raising prices on cost-conscious customers typically isn’t an option, employers are forced to reduce costs elsewhere. That means asking employees to do more with less (e.g. laying off bussers and requiring servers to bus their own tables) or moving toward self-service options where technology replaces human labor.

New technologies are being deployed to reduce the need for additional servers. Several large chain restaurants are already utilizing table-side computer screens that allow customers to order food and pay their check with minimal need for a server. Other chains have moved to iPhone apps allowing diners to pay their bill and iPad apps to allow diners to view menu items. These new labor-saving technologies could soon become the norm for restaurants, just as many grocery stores and gas stations now utilize self-service.

What Does the Research Say about Tipped Wage Increases?

The overwhelming consensus among economists is that increases to the minimum wage reduce job opportunities for the least skilled workers—85 percent of the most credible studies from the last two decades support this.

Research shows that increases to the tipped wage also result in a loss of work opportunities. Economists William Even at Miami University and David Macpherson at Trinity University examined 20 years of federal data to assess the impact of state increases to the tipped employee category. The authors found that for every 10 percent increase in the tipped wage, employees’ hours of work were reduced by just over five percent.