Why Tips (and More) Drop When Tipped Minimum Wages Increase

A recent commentary on Portland, ME’s tip credit elimination ballot measure argues tipped restaurant employees don’t need to worry about losing their tips when the tipped minimum wage is forced up to $18 per hour.

Yet the very restaurant employees organizing against Portland’s Question D say they earn far more than the minimum wage on tips, and argue not only will their tips decrease with the new measure, but their jobs and employers may not survive at all.

What’s the reasoning behind employees’ argument?

Portland’s Question D would raise the city’s minimum wage to $18 per hour, and phase out the tip credit and nearly triple the current wage requirement for traditionally-tipped employees. For restaurants operating under the industry’s notorious razor-thin profit margins (often as low as 2%), this massive spike in the costs of employing each worker may cause shifts in the business model.

  • Some restaurants have tried passing off costs to customers by increasing menu prices. In order to retain a customer base who may be unable to afford significant price hikes and additional tipping, some restaurants have tried introducing no-tipping required models, replacing tips with a flat service charge.
  • If restaurants can’t raise prices, they may be forced to reduce their staffing levels. This means some employees may be able to keep their jobs at the higher hourly minimum wage rate, but many will lose shifts or their jobs altogether – reducing important income opportunities.
  • If other adjustments don’t alleviate the continuous upward wage pressure, many restaurants may decide to close altogether – leaving existing employees out of a job and reducing job opportunities in the industry.

So what is the track record of tip credit elimination when it comes to employees’ livelihoods?

  • It reduces tip income: U.S. Census Bureau analysis of state tipped minimum wages across the country finds that as the required base tipped wage increases, tip income decreases by roughly the same magnitude. A Cornell University study also found that states with higher tipped minimum wages tend to have lower average tip percentages in restaurants than those with lower tipped wage requirements. Many restaurants that have tried switching to flat minimum wage models for traditionally-tipped servers and bartenders have reversed course, due to backlash from employees themselves who say this method significantly reduces their earning potential.
  • It causes employment loss: Economists from Miami and Trinity Universities compared states with compromised (little to no) tip credits to those with robust tip credits allowing employers to count more tips toward the minimum wage requirement. In markets such as Seattle and San Francisco which have eliminated tip credits altogether, full-service restaurants employed 18% fewer tipped employees than in areas with lower tipped minimum wage requirements. They also determined tipped employees in these high-wage markets had 19% fewer work hours than in lower-cost areas. A more recent study by University of California-Irvine economists finds raising the federal tipped wage by $1 would cause as much as a 6.1% decrease in employment in the full-service restaurant industry.
  • It triggers business closure: A Harvard Business School analysis concluded that each $1 increase in San Francisco’s tipped minimum wage correlated with a 14 percent increase in the likelihood of median-rated restaurant closure, taking tipped employment opportunities with it. Amid minimum wage hikes in Seattle (which has eliminated tip credits altogether) forcing up labor costs, many Seattle restaurants were forced to close – dropping its employees’ pay to $0 per hour as it closed its doors. After San Francisco restaurant owners met with the Board of Supervisors to address the city’s mounting regulations and mandates as obstacles to their survival, in 2019, restaurant closings surpassed openings by 9%.

After Maine and District of Columbia voters approved ballot measures to eliminate their tip credits, tipped restaurant employees were first in line to oppose the potential changes to their livelihoods based on these economic realities. Their testimonies successfully caused the Maine legislature and the D.C. City Council to repeal the measures. Other employees in New Mexico, Virginia, and New York have also rallied in favor of saving tip credits from potential legislative action.