Tips are wrong and should be banned

The NYT recently ran a great long-form story on the plight of nail salon workers (Part 1 and Part 2] The main gist of the story is that nail salons, facing incredible competition in recent years, have decreased pay for workers far below any semblance of a minimum wage. Oftentimes, workers don’t get paid at all for their first few months of service until they have “proven” themselves to their owners.

One aspect of this story really annoys me, and that is the issue surrounding tips. Nail salons, like many other personal care industries, rely on a tipping culture that systematically underpays workers, complicates regulations, and encourages discrimination. Tipping should be phased out immediately throughout the United States.

Under our current labor regulations, employers in establishments with tipping are required to pay a base wage that is below minimum wage, with the idea that tips will fill in the gap. When wages plus tips fall below minimum wage, owners are supposed to make up the difference to guarantee that workers are paid appropriately.

Of course, this is where the complications in the regulations start, because calculating tips and minimum wages in order to follow the law is not at all clear in these contexts, particularly in personal care establishments with notoriously poor record keeping.

I focus on simplifying labor rules since this can have benefits both for employees (who can understand their rights better) as well as employers (easier accounting and more clarity over who is owed what). Tipping and the legal complications around it is just another example where the law has been written to create litigation and costs. This was also the theme of the article I wrote in the National Review a few weeks ago about wage theft.

I want every person providing me service to have a minimum wage, without relying on me to add an extra dollar to my receipt or into the tip jar.

The problems with tipping go beyond simply the levels of wages, but also their variability. One reason that tips are used is that it allows owners base worker pay on actual revenues rather than projected revenues. The more that wages come from tips, the more that expenses and revenues are aligned for an owner, but at the expense of the certainty of wages for the employee. Since tipped-compensated workers are often those who can least weather the variability in their income, it would seem prudent to replace tips with wages.

Beyond the economics of the situation though, tips have a variety of other problems. They can be hard to calculate, and the culture around tipping can be complex even for Americans to understand. Furthermore, there is a master/servant relationship taking place in these tips, which is among the reasons why they are relatively uncommon in much of Europe and Asia.

Finally, and perhaps most importantly, tips don’t really affect service quality. As any economist will explain, tipping after service is useless since the service has already been rendered. Since a worker has no idea how a new customer is going to tip, they don’t have an incentive to put in extra effort. (There is an old economist story that someone traveling out of town should never tip, since tipping is more about repeated future service than a reward for past service.)

Thus, we have this practice that looks like improving service, but is really about increasing the burdens on workers while simultaneously increasing the complexity of employment laws and complicating government enforcement.

Tipping is one of those societal vestiges that for some reason just doesn’t seem to want to die. The good news is that Silicon Valley companies realized long ago that tipping was harmful to the consumer experience, and has mostly eliminated the practice from its product. It’s well past time that everyone else followed through.

Image by m kasahara used under Creative Commons.