The Other Minimum Wage: Restaurant Workers and the Tipped Minimum Wage

Written by Ade Samuel and Dr. Amy K. Glasmeier on 05/29/2019

In recent times we’ve seen a growing fervor behind movements to increase the minimum wage on a federal level, and in different jurisdictions across the country. Prominent voices on the congressional floor are broaching the issue of wage disparity, and looking to use the federal minimum wage as a means to bridge the widening income gap. These efforts and conversations are garnering an understandably significant amount of media attention as the nation debates what standard of living even the most meager of wages should provide. An inherent but often less prevalent aspect of these discussions is what the future holds for the established “tipped minimum wage”. The minimum wage is somewhat of a false floor in the United States because of the provision that allows employers to pay tipped workers less than this minimum. Tipped income employees find themselves in particularly precarious financial situations, yet despite this fact, their plight often goes unaddressed in discussions of necessary wage reforms.

The concept of a tipped minimum wage first manifested as a part of the Fair Labor Standards Act of 1938. In its inaugural form, the concession was presented as a “tip credit” afforded to employers whose employees were deemed to receive a significant portion of their earnings from tips. A new wage floor was established for employers who found themselves in this situation, with the tip credit thought to make up the difference between the tipped minimum wage and the standard minimum wage. This credit was originally configured to be no more than 50% of the standard minimum wage. For the next several decades the two wages were coupled in this fashion with the tipped minimum being maintained at half of the standard minimum. However, in 1996 the Fair Labor Standards Act was amended and the two wage floors were decoupled. Since then, the federal tipped minimum wage has remained fixed at $2.13 an hour which was 50% of the standard minimum wage at the time, despite several minimum wage increases over the last 22 years (1). As things stand today the allowable tip credit is almost 71% of the standard minimum wage, far greater than what was intended when the concept was first introduced.

This disparity leaves tipped workers in a vulnerable position when it comes to the compensation they receive for their work. A study performed by Maggie Jones of the US Census Bureau is part of a growing literature that explores the avenues for worker exploitation stemming from the nation’s tipped income policies. Jones’s research presents a new method for analyzing impacts of tipped minimum wage shifts in the restaurant industry by linking data from W-2’s (IRS statement of earned income) collected between 2005 and 2011 to the Current Population Survey Annual Social and Economic Supplement (CPS-ASEC) for 2006 to 2012 using recorded social security numbers (1). She uses the “difference-in-differences” approach to see how shifts in tipped minimum wages affect, hourly wages, hourly tips, employment and hours worked. Moreover, her work critically analyzes trends observed in these variables to determine whether the labor market structure in the restaurant industry exhibits characteristics of a monopsony. A monopsony is a market condition similar to a monopoly. However, in a monopsony instead of there only being one seller of a particular good (as is the case in a monopoly) there is only one buyer of a particular good. In this case, the major concern is that the buyer of labor of restaurant employees is the restaurant owners paying staff wages (1, 2).

Jones’s research finds that in areas where tipped minimum wages are increased there is an increase in the wage paid by employers, however, there is a corresponding decrease in the tipped earnings of employees. The offset of these two factors means that tipped employees do not generally experience an increase in earnings related to tipped income as a result of increases in the tipped minimum wage. Jones also finds a quadratic relationship between minimum wage shifts and shifts in levels of employment for tipped workers in a particular area. Her data show employment initially increasing with increases in the tipped minimum wage then eventually leveling off and decreasing as the tipped minimum continues to increase. These trends are indicative of monopsonistic labor market conditions (1). As the number of servers at a given restaurant increases, the percentage of total tips going to each employee decreases (given a fixed number of total tables served by employees). Restaurant owners must then make up for the decrease in tipped earnings for each of their employees by increasing their respective wages. These factors incentivize restaurant owners to keep employment low so as to reduce costs and allow for restaurant owners to pay a wage lower than what would be demanded in a competitive labor market.

States and smaller jurisdictions have taken steps to protect tipped workers in recent years by abolishing the tipped minimum wage. However, as the push for wage reform as a solution to income inequality becomes stronger and stronger it is important to ensure that this wave of sweeping progressive reforms helps those who need progress the most. Addressing the potential for worker exploitation stemming from the tipped minimum wage, at a federal level, is one way to send a message along those lines.