Analysis | How to tip more effectively

Remark

I recently went to the movies and when I bought my ticket I was asked if I wanted to tip. I said no. Should I feel guilty for being a cheapskate? Tip requests are on the rise, not only from the store clerk selling you a bottle of water, but also from the company servicing your mortgage.

If you regularly visit what we economists like to call the leisure and hospitality sector – that is, if you ever go out to eat or drink, or to watch a movie, a show or a sporting event – you may have noticed that tip requests are not only more common, but that the tips requested are higher. That begs the question: if you tip more, does it help employees?

Instead of the standard 15% tip, the options on the credit card touchscreen are often 18%, 20%, 25%, or a custom tip. All of this is clearly a nudge towards boosting tipping. But giving bigger tips to service sector workers doesn’t necessarily mean they’ll have more money in their pockets.

Consider a scenario in which the initial effects of tips reverse themselves – that is, wages will fall to offset the value of tips. If the official wage is $10 an hour and tips average $10 an hour, that works out to $20 an hour. If tips from everyone — not just you, but everyone else — increase by another $3 per hour, the new take-home pay is $23 per hour.

More people will apply for that higher wage. The increased labor supply allows the boss to pay less than $10 an hour; it may be enough to pay just $7. Under the new regime, with tips at $13 an hour and the formal wage of $7 an hour, $3 an hour has essentially been transferred from customers to restaurant owners. The workers don’t get any extra money, but the owners snuck the customers into paying a higher portion of the wage bill.

In this case, you would do better by smuggling some money into an individual employee. That way, at least one person gets some extra cash while avoiding being part of a system that puts less strain on the employer.

But does this set of facts — collective increases in tips offset by lower wages — apply to current conditions? Probably not, at least not right away.

That answer requires some explanation. Employers have traditionally been reluctant to raise wages for fear that they will find it difficult to lower them when necessary (wages often linger downwards). The one time they can raise wages is when there is a labor shortage, as is the case now, but even then they may be reluctant to stay ahead of the market. Instead of increasing their wages, they let their customers increase their tips.

Good news: For now, your tip will increase employees’ take-home pay. Bad news: It’s doing this in a way markets should, but don’t want to.

Ultimately, those higher net wages will attract more workers to the relevant service sector, which will benefit your fellow customers, who will receive better service. So another beneficiary of your tip is the guy sitting next to you at the movie theater who doesn’t have to queue as long for his popcorn. That’s what your tip pays for.

Over time, the market will recalibrate, labor shortages will disappear, and once again employers will replace your more generous tip with their own pay rise. In the end, you will prove to be the sucker again. But for now, before the markets fully adjust, you are indeed putting more money in the pockets of the workers.

• If only you tip more, and not all customers, the profit probably goes to the employee.

• Therefore, if you’re going to tip more, give cash to a real person rather than in response to a prompt on the touch screen.

• If you want to give a collective tip, you are not helping the employees much under normal circumstances.

• Under the abnormal conditions currently prevailing, even a collective tip is more likely to reach employees, attract more workers and help your fellow customers.

• In the longer term, however, a collective tipping system will ensure that part of the wage burden is shifted from employers to customers.

So do you still want to tip more? You should. But with a little thought, you can do this much more effectively.

Analysis | How to tip more effectively

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