Economists Find Tipped Minimum Wage Hikes Kill Jobs, Ineffective at Targeting Poverty

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A new study published by the National Bureau of Economic Research corroborates the existing economic literature: raising tipped minimum wages is actually harmful to tipped workers, and does not effectively address poverty despite what anti-tip credit activists claim.

Drs. David Neumark and Maysen Yen at the University of California-Irvine find that data from three decades of tipped wage increases reveals negative impacts for tipped workers, and little effect on alleviating poverty. The study finds:

  • Increasing tipped minimum wages reduce employment in the full-service restaurant sector. Neumark and Yen find that the average employment loss from 1990-2019 is 0.08% for every 1% increase in the tipped minimum wage for employees in full-service restaurants. This amounts to a nearly 4% decrease in employment if the federal tipped minimum wage was increased from $2.13 to $3.13.
  • Due to job loss, raising tipped minimum wages does not have a significant effect on total earnings. The economists find that because raising tipped wages will have a significant negative effect on employment in affected industries, such a policy will not have a positive effect on net total earnings — i.e. the trade-off between workers who get to keep their jobs amid a tipped minimum wage increase and workers who get laid off due to a tipped minimum wage increases is likely to result in a net zero change in earnings. Even for employees who do keep their jobs, the evidence “does not point to strong positive effects on average weekly wages,” and “weak effects on average earnings reflect hours declines.”
  • There is no evidence to suggest eliminating the tip credit would result in alleviating poverty. In the three decades of data studied, Neumark and Yen conclude a higher tipped minimum wage is “never associated with lower poverty, lower extreme poverty, or lower near poverty.” Eliminating the tip credit means raising the tipped minimum wage to match the regular minimum. The economists find that because the population of tipped employees are less likely than other minimum wage earners to be below the poverty line, eliminating the tip credit is even less likely than raising the general minimum wage to drive benefits to poor families. Neumark and other economists have expressed that general minimum wage increases are already less effective at targeting poverty than other policies, such as expanding the earned income tax credit, and now show eliminating the tip credit would yield even less effects for the poorest families.
  • The authors note that Bureau of Labor Statistics data used is likely to not capture the full income tipped employees receive through their tips. Both data analysis and accounts from tipped employees indicate that traditionally-tipped employees, such as servers and bartenders, make well above the current regular and tipped minimum wages due to their tips. An analysis of reported total earnings finds that servers and bartenders in states that adopt the federal tipped wage of $2.13 in 2020 made an average of $15 per hour. But tipped employees who have successfully rallied to save the tipped wage argue that because of the current base wage plus tips system, they earn as high as $45 per hour, or even more. If the employment loss projections found in this latest study materialize, raising tipped minimum wages will take away these high-paying tip opportunities for many employees across the country.

Read the full analysis here.

Various studies have found that raising the tipped minimum wage, or eliminating the tip credit entirely, has negative impacts on the number of tipped jobs, scheduled hours, and employees’ income, and even causes business closures. This latest study provides further evidence that eliminating tip credits will harm the livelihoods of tipped employees across the country. That’s why many have successfully rallied to save the tip credit in states including Maine, New York, Virginia, New Mexico, and the District of Columbia.