Proposition I-82, a proposal to phase out the use of the “tipped” minimum wage, has passed in the District of Columbia’s midterm election. A similar proposition was rejected by voters in Portland, Maine. It is interesting that this proposal should have resurfaced in D.C., which according to the May 2021 Bureau of Labor Statistics “Occupational Employment and Wages” report, compares favorably against any state in terms of annual mean wage estimates for waitstaff. In those terms, it already ranks higher than Washington State, a state that has phased out the tipped minimum wage. According to the BLS estimates, the annual mean wage for waitstaff in D.C. is $48,240 and $44,490 in Washington State.
Where you stand on getting rid of the tipped minimum wage may depend on whether you think people will stop or continue tipping on top of the new wage requirement. Basic economic analysis would posit that if costs uniformly rise for restaurants, the supply of restaurants would go down, and restaurant meals would get pricier. It is reasonable to expect people to quit, or at least reduce, tipping in response, and for restaurants that stay in business to reduce their hiring of waitstaff to a significant degree.
However, people who continue patronizing full-service restaurants may still tip on top of what they pay for the meal. Tipping is something of a culturally ingrained custom, especially among millennials and newer generations, many of whom work or started out working in the service industry. Ending the tipped minimum wage could thus potentially be a boon to restaurant workers. They would earn a higher base wage while still being tipped on top of it. A huge win, right? It is, but only for those who retain long-term work in the industry.
As an alternative to pricing the new labor costs into customer checks via service charges, restaurants may choose to cut back on the amount of labor they hire instead. In this scenario, restaurant workers who remain in the industry will gain, while those who lose or can’t find a restaurant job won’t. Some restaurants have voluntarily gotten rid of tipping at their establishments in favor of service charges. While some experienced success, others saw reduced wages for staff and less customer satisfaction.
Without tipping, it may make sense to cut back on labor if it improves service in addition to cutting costs. If a smaller fraction of a server’s income comes from tips, we may expect that server to cut back on the quality of the service they provide to customers. This is what we call the “principal-agent” problem. Managers cannot oversee waiters at all times, and, with tipping, the cost of oversight is in large part shifted to the customer. Without tipping, restaurants will likely impose stricter requirements and oversight of the workers they hire. This could mean higher salaries for restaurant managers or greater profitability for businesses that supply “solutions” to the service problem.
The results in D.C. are likely to be mixed. Restaurant enthusiasts may continue to tip at the same rate while others will cut back or stop altogether. The supply of restaurants will fall unless restaurant owners are able to cut costs elsewhere. Large restauranteurs, like D.C.’s José Andrés Group, will likely handle rising costs better than the many mom and pop shops in the district. Given that the tipped minimum wage is being phased out, coming into full effect in 2027, inflation could erode some of the increase, and blunt its effects.
As is usual when labor becomes pricier, youth employment is likely to take the biggest hit. With waitstaff becoming more expensive, restauranteurs will be less likely to give young, inexperienced employees a shot at making money in their places of business.
