Under federal law, there are two classes of workers: those who make tips and those who do not, with different rules for each. Since 2009, the federal minimum wage for regular workers has been $7.25 an hour. For tipped workers, it’s been far lower for far longer — $2.13, where it’s been stuck for more than two decades. In theory, employers are expected to make up the difference if tips don’t bring workers up to the regular minimum wage. In practice, particularly in the restaurant industry, servers’ dependence on their bosses to get good shifts means few complain if they don’t get the wage gap closed.
This two-tiered system is a peculiar anachronism. It was imported to the United States by wealthy U.S. travelers seeking to re-create the customs of the European aristocracy, and the practice proliferated after the end of the Civil War as a means for the restaurant and hospitality industry, led by the Pullman Co., to hire newly freed slaves without paying them base wages. The effect was to create a permanent servant class, for whom the responsibility of paying a living wage was shifted from employers onto customers. In many other countries, waitstaff were eventually brought to legal parity with other workers, understood to be professionals like anyone else. In “Homage to Catalonia,” George Orwell described his shock upon arriving in Barcelona and observing that “waiters and shopwalkers looked you in the face and treated you as an equal.”
This did not happen in the United States, where tips were enshrined into law, affecting nearly 6 million workers today, 65 percent of whom are women. Waitstaff and bartenders who earn sub-minimum wages are more than twice as likely to live below the poverty line as non-tipped workers. Yet the wage floor varies across the country, as states set their own regular and tipped minimum wages.
Seven states — Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington — have eliminated the two-tiered system entirely. New York appears to be the next state that will join this trend: Gov. Andrew M. Cuomo (D) recently announced that he will hold hearings to explore setting a single statewide minimum wage for all workers. And in the District, advocates have collected enough signatures to put the issue on the 2018 ballot but are facing a legal challenge.
Opponents of this trend, notably the restaurant industry, have argued that such measures would be disastrous for restaurants, causing them to raise prices, lose business and slash jobs. Dire warnings that customers would stop tipping entirely persuaded legislators to invalidate a higher tipped minimum wage approved by referendum in Maine.
Are these concerns valid? The very fact that people haven’t stopped going to restaurants or tipping servers in California or Montana suggests that they are overblown. To gain further insight, we looked at the impact on restaurant worker earnings and employment from New York state’s last increase in the tipped minimum wage, from $5 to $7.50 in 2015, using data from the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages, which tracks employment and earnings by industry.
What we found was that in the year following the increase, full-service restaurant workers saw their average take-home pay (including wages and tips) go up 6.4 percent, a larger increase than in any neighboring state (none of which increased their tipped minimum wage in that period), while the number of these workers increased by 1.1 percent, or 3,751 new jobs.
But there are many other things that may affect employment and earnings. A boom or bust in the economy of the state, or even in New York City alone, could mask whatever effect a minimum-wage hike might have had. And the question remains: Compared to what? We wanted to know not only whether New York’s restaurant workers benefited from the wage hike, but whether they did so relative to restaurant workers elsewhere.
To better isolate the effect of New York’s tipped-minimum-wage increase from other factors, we also compared restaurant worker earnings and employment in counties on either side of the New York-Pennsylvania border, the longest border New York shares with another state. Pennsylvania offers a clear contrast; it last raised its tipped minimum in 2007, and it now sits at $2.83, far lower than New York’s. Counties on either side of this border share mostly the same economic indicators and labor pools and thus provide a natural experiment for the effect of a policy change on just one side of the border.
Our findings show that restaurant workers in counties on the New York side of the border did better than those in counties on the Pennsylvania side. On the aggregate, in the year following the tipped-minimum hike, those New York border counties saw restaurant workers’ take-home pay go up an average of 7.4 percent and employment go up 1.3 percent, compared with Pennsylvania border counties, which saw a pay increase of 2.2 percent and a decline in employment by 0.2 percent.
These findings are just one part of the puzzle; changes in earnings and employment can vary a lot by establishment, which cannot be captured by county aggregates in the BLS data. Small changes in employment may be statistically insignificant and consistent with frictional unemployment, the standard flux of people leaving jobs and looking for new ones.
But the results for earnings are clear. Restaurant workers did not lose take-home pay following the tipped-minimum-wage hike; in fact, they earned significantly more — and more relative to their neighbors. At the same time, there is no evidence it had a negative effect on employment.
Sometimes the hardest patterns to see are those in which nothing happens. For decades, restaurant industry lobbyists have predicted that the sky would fall with each tipped-minimum-wage hike. After the successful adoption of single tiers in seven states and countless raises in others, it’s time to acknowledge that such Chicken Little scenarios have failed to materialize.