I got a lot of great comments on last week’s post about what would happen if tipping became the norm at McDonald’s. See especially these comments by Eric Rall, Jeff (nice catch, but I’m using “McDonald’s” as a stand-in for all fast food), Marcos Portillo, and Tim.
The answer, which is basically a paraphrase of what Landsburg says in his Price Theory textbook, is that fast food workers wouldn’t see an increase in their take-home pay.
Fast food is the epitome of low-skill, low-wage labor. Indeed, I have a hypothesis I want to test someday that fast food and retail selects the part of the skill distribution that would have been in agriculture fifty or a hundred years ago. Hence, comparing retail workers’ wages today to retail workers’ wages and working conditions in 1955 compares apples to oranges. An apples-to-apples comparison would look at how today’s retail workers’ wages and working conditions compare to those in the lowest-skill occupations, like agriculture. Even if real wages haven’t changed, working in an air-conditioned McDonald’s or Walmart is almost certainly preferable to outdoor agricultural work. But that’s another conversation for another day.
In the long run, the prospect of tips will attract more workers into fast food, lowering the wages firms have to pay to attract workers. On net, workers end up earning whatever they would have earned before, just with a different composition (more tips, lower wages).
READER COMMENTS
Chris Anderson
Aug 6 2013 at 12:15pm
Do you not, in some sense, encourage “better” employees by setting up a predominantly tip-based remuneration scheme than by setting up a predominantly wage-based remuneration scheme?
For example, if what you say is true, then in equilibrium, I wouldn’t care whether I worked at McDonalds ($2 an hour plus tips = $11 an hour) or FastFoodCo ($11 an hour wage, no tips).
However, I know that my wages at FastFoodCo are fixed, so I have no incentive to do more than is required of me to earn that wage. But if I work at McDonalds, any harder work would be rewarded in greater tips, so I have an incentive to produce more. This higher production should benefit both employer and employee, and relies on the willingness of some customers to reward better service.
I realise that, in a perfect economic world, all $11 an hour workers should provide the same productivity levels, but this world isn’t perfect, and I can’t help feel that if you change the incentive, some will surely suddenly work harder than others.
Hazel Meade
Aug 6 2013 at 12:26pm
I’m not sure if this would hold entirely.
Tipping is voluntary and varies from customer to customer. Thus, it would be preferable of ver a general wage increase. The people willing to pay 50c more per burger would just tip 50c to the worker. People who couldn’t afford it wouldn’t. A reduction in wages paid by the emplyoer would also increase employment. More people would get jobs working at McDonals and some income would be supplemented by tips.
It’s not at all clear that this would work out to be a net wash for low-skilled workers. It could be that the lowest skilled would gain by having a job in the first place. The highest skilled would get a net pay increase, and the people in the middle would lose wages due to competition.
Ted Levy
Aug 6 2013 at 12:32pm
This makes sense outside the context of minimum wage. But with minimum wage, since the wage cannot be lowered as a response to tipping, I don’t see how this analysis is complete.
Jack Davis
Aug 6 2013 at 1:41pm
One thing may not have been mentioned: Tips are easier to shield from taxes than wages. As a tax preparer, I tell people they have to record all their tips, but I know they don’t.
Art Carden
Aug 6 2013 at 2:37pm
Thanks for the truly excellent comments. Here’s where I think there would be a noticeable change: adding tips at McDonald’s would unbundle food and service. In repeat interactions, especially, the tipper might also encourage the worker to develop knowledge of “the particular circumstances of time and place” and to go out of their way to make sure the food was hot and fresh.
RPLong
Aug 6 2013 at 2:50pm
I read the headline of this blog post, “What if Tipping Became Norm MacDonald.”
Suffice it to say, that blog post would have read much differently than this one.
Scott M
Aug 6 2013 at 5:03pm
One problem with tips is that the government taxes the worker based on the assumption that they made x% in tips. In jobs where tips are unlikely, or people don’t see much value in what the person is doing, the people would not get tips. If they are paid the minimum wage for a service job with tips, they could end up making less. (Starbucks comes to mind – the price is high, they are so slow, some baristas are at best indifferent and often rude, so I seldom tip).
Hsin Yi Vivian Hsieh
Aug 9 2013 at 10:16pm
I think that if workers were paid with tips, then you would have exceptional workers who earned well over the minimum wage currently held, and in that case the employers would continue to lower wages, in which case the minimum wage would have to be adjusted. I also agree that employees will just end up earning what they have in the past because when customers are expected to tip the workers, it’s basically like a tax that factors into the price of a McChicken, and as a result the demand would decrease. This would then lead to employees lowering wages for workers, because employees usually bear a greater burden of the tax than the employers.
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