Economics of tipping: Do tips help or hurt?

December 26, 2018

Every day, Americans take part in a curious economic exercise. They willingly pay extra at restaurants, hair salons, hotels and in cabs. In fact, these tips have become so expected that employers in many industries pay lower overall wages with the assumption that gratuities will make up the difference and fully provide for workers’ pay needs. However, tipping can be a confusing practice, because expectations vary according to industry and geographic area. Many say that gratuities hurt more than help those in service-sector jobs.

Economic principle of tipping

At first blush, tipping seems like an inconsistent economic activity. But it is based on the principle of incentives to encourage better service. In theory, without tipping, service providers may have different interests than those receiving services. Gratuities help level the disconnect between provider and recipient.

History of tipping

The use of gratuities emerged in 17th-century England. Tipping was first used in lodging establishments but soon spread to dining and other commercial applications. For much of the history of the United States, tipping was considered inconsistent with democratic principles and discouraged. In fact, several states passed laws outlawing tipping. However, in the 20th century, these attitudes began to change and tipping became more acceptable. Over the last 100 years, the use of tipping has spread, as has the amount of tip expected.

Tipping practices vary by country

While tipping has become nearly ubiquitous throughout the United States, in many countries, tipping is not expected and can even be considered offensive. It is a common practice in many European countries, but almost nonexistent in Asian countries. Often a service charge is included instead of a tip.

Even in America, tipping is expected in many service-based industries, but strongly discouraged in others. In the public sector, for example, tipping is explicitly prohibited by law. Politicians or civil servants can be prosecuted for accepting tips because it violates bribery laws.

Movement against tipping

Even though the use of tipping has spread throughout America and other parts of the world, many people consider the practice to be discriminatory and unfair. Why do servers in restaurants receive tips while cooks do not? Why do baggage handlers and room cleaning staff in hotels get tips while front desk staff and others receive nothing?

Furthermore, studies have found only a loose correlation between the quality of service and the amount of gratuity given. Instead, the size of tips is often influenced by the time of day, whether free items such as bread or crackers are offered, or by other amenities not tied to the service provided by a worker. In fact, some people argue that tipping promotes discrimination. Young, attractive people tend to receive better tips than older and less attractive people. Minorities are chronically under-tipped.

What’s the future of tipping?

Concerns about the inequities of gratuities have led to a push away from tipping. Some restaurant owners have begun to add automatic service charges of 15 to 20 percent instead. Others advocate higher minimum wages for all service workers, making tips a less essential component of overall compensation.

However, in other areas of the economy tipping is expanding. Uber recently implemented a new policy allowing tips to be added in its app, relenting to pressure from drivers. Uber reports that since the new policy was implemented, drivers have collected more than $600 million in tips.

While the practice of tipping may be controversial it seems here to stay, at least in the foreseeable future. Fair or not, it seems to be well established in modern American life.

Robert Spendlove is Economic and Public Policy Officer for Zions Bank and a member of the Utah House of Representatives representing District 49.

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