Research on tip credit scant
I thought, given the debate in Minnesota again over the tip credit, that I would see if there was economic research on this topic. There turns out to be very, very little, and what there is turns out to have been written by two friends, John Anderson of University of Nebraska-Lincoln and Orn Bodvarsson of SCSU.
Do higher tipped minimum wages boost server pay?
Published in Applied Economics Letters 12 (2005), pp. 391–393; doi 10.1080/13504850500092459
Abstract: Do tipped servers in states with higher tipped minimum wages earn more, ceteris paribus, than servers elsewhere? Using 1999 data on waitpersons and bartenders, little evidence is found of a premium to servers in states with more generous minimum wages.
Articles in Letters tend to be quite short -- that's the idea -- and you can read it in less than 20 minutes. Or at least, I did. Anderson and Bodvarsson divide states into five categories regarding the relation of state law on minimum wage and on the tip credit. The top category was "States with no tip credits and minimum wages that exceed the federal minimum wage" -- see Table 1 in the paper, category 5. Minnesota was in that category at the time. In that case the effect was to increase the pay of servers by 7.8 cents an hour, or $3.12 a week on a 40 hour week. The federal tip credit in 1999 was $3.02 per hour. So almost all of the tip credit was compensated for by other behavior. This could be a labor supply response (greater competition among servers for jobs in restaurants) or a demand response (fewer restaurants due to higher labor costs.) Anderson and Bodvarsson conclude:
We conclude that, for the most part, servers in those states with higher tipped minimum wages appear to have no income advantage over servers elsewhere. States with policies designed to boost the incomes of servers, often the lowest paid occupations, will find that those policies are generally ineffective.
The situation has changed, since Minnesota now has a minimum wage below the federal level. As I read the paper (I've asked Bodvarsson to confirm this for me, he thinks I'm correct but do not attribute to him), we are now in what is Category 2 from Category 5. Thus handing out the tip credit will not change take home pay, as I understand their model.
A search of literature on ECONLIT did not turn up any other research; I did not find any in SSRN or REPEC. I dislike having to quote just one article -- even when it's two friends -- but that appears to be all there is. Pointers to additional research greatly appreciated; please leave in comments.
I'd note one other possibility from the minimum wage discussion that is often called the Wessels effect or Wessels-McKenzie-Tullock effect: The tip credit or lack thereof is compensated by decreasing fringe benefits and conditions of employment. As Tyler Cowen noted back in 2004, Tullock argues that "the government can make an employer raise nominal money wages, but can't stop him from turning off the air conditioner." The same may apply to servers, whose work conditions can vary widely from restaurant to restaurant.
Cross-posted and comments welcome at SCSU Scholars.
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