Some time ago I logged a comment on David Friedman's economics blog in response to a post entitled, "Why do we tip?" It was meant to be a quick reaction to what I thought was a curious trail of other comments, but I ended up writing much more than I'd intended.
Periodically since then--especially when I'm out at a restaurant and about to calculate the tip--I think about that thread, and it still disturbs me . . . primarily, I think, because of the apparent lack of thoughtfulness and the extreme self-righteousness that most people display when they discuss the issue of tipping. And, perhaps most disturbing of all, this entire discussion occured on an economics-focused blog, where you would expect the author and his regular readers to approach things in a rational, businesslike way and look at all of the incentives involved in the exchange.
And so I'm going to recycle a lot of my original argument here in an attempt to get to the bottom of this phenomenon once and for all. Why, ultimately, do we tip waiters in restaurants?
In almost every case people trying to answer this question look at the incentives from only a single angle: that of the restaurant patron. Why does the customer tip? What's in it for him or her? To insure prompt service, of course. This line of reasoning invariably leads to people puffing out their chests and huffing about the level of service they expect in a particular type of restaurant and how much it is worth for someone to bring them an iced tea as opposed to filling it themselves from an urn on the counter. And this gets annoying really fast, especially to anyone who realizes that the average diner has as little insight into all the other things going on in a waiter's or waitress's job than the average waiter has into what their customers have going on in their personal life outside the walls of the restaurant.
The incentive for a customer to tip is one factor, but it's not the really important one. In one sense, we still have the seemingly-archaic practice of tipping because it's good for the restaurant owner's bottom line. Why, after all, are grocery cashiers paid by the hour, teachers on a straight salary, lawyers on salary with huge bonuses, and salespeople on commission? Over time, these compensation schemes have proven to be the most effective way for a businessperson to get the desired behavior out of a particular type of employee. In the case of waiters, a tip-based compensation model helps insulate the owner from taking a bath on a slow night--if not enough customers come in the door, the wait staff takes home a smaller amount of money. Waiting tables is very much a customer-facing sales position, and any waiter who has figured out how to upsell tables with appetizers and drink specials understands that tipping is essentially a slightly-unstable commission system.
Tipping works out just fine for the restaurant owners. If it didn't, and moving from a tip-based scheme to a flat hourly or salaried package would actually ensure better performance from the staff and higher returns for the restaurant from all the pleased repeat customers, you can bet your sweet bippy you'd see more and more restaurants posting "Please, no tipping" signs and paying their waiters a regular wage (like most grocery stores now do for bagboys).
But, the real key lies in the incentives for waiters or waitresses to work for tips. The federal minimum wage laws provide for a "tip offset", which allows a restaurant to pay its employees a greatly-reduced minimum wage of $2.13 per hour, provided that when they add in tips a waiter or waitress's total hourly take exceeds the minimum wage. From a practical standpoint, since a waiter at even a mid-priced restaurant can take home 30 or 40 bucks for a 4-hour shift, this means that waiters are working primarily for the tips.
Ultimately, it's the waiter's total take-home--and the opportunity cost--that matters. If the total wages and tips combined did not exceed what that person could reasonably expect to make in another line of work, then that person would likely move on to other jobs. From the restaurant owner's point of view, if the diners all suddenly turned into my step-father-in-law and started tipping only 3% on their checks, then likely many of the restaurant's servers would quit, and the owner would have to raise the hourly pay to attract and keep enough workers to run the business, which means labor costs would go up, and in the end the owner would have to raise the food prices to compensate--which means the diners would wind up paying for the service in one way or another.
Essentially, the waiter labor market is at an equilibrium where, on average, the amount of money the restaurant patron is willing to pay (whether out of conformity or guilt or pride or sympathy or whatever) is sufficient to supplement the tiny hourly wage paid by restaurant owners and attract enough people to serve as waiters.
So why do we tip? A commenter named Justin from David Friedman's site noticed an interesting fact about the tip jar on the counter of the coffee shop where he worked: "people tip more when there is a good deal of money already in the jar, and they tend not to tip much when it's empty." And why is that? The tip jar is a signal of the proper social behavior: Am I supposed to tip these guys for bringing me coffee or not--oh, look, a bunch of other people have tipped them, so that must be the right thing to do. I feel the exact same way at Andolini's Pizza, which has an "Instant Karma" jar on the counter that always prompts me to leave a tip even though there's not really any waitress service, just because I'm worried the people who work there will think I'm a cheapskate if I don't.
We tip because everyone else does. Would it make a difference if we all decided overnight that it's a silly convention and we weren't going to follow it anymore? I've heard a lot of ludicrously convoluted rationalizations for how people arrive at a tip amount other than the standard 15% (like timing out how long it takes a bartender to fill and deliver a beer glass and backing into the tip from a reasonable hourly wage), but amid all the seemingly-relevant detail these explanations universally ignore the fact that the customer and the waiter aren't negotiating before the meal and agreeing on a mutually acceptable price. Chest-Swelling Consumer Boy may think all a waiter's effort in taking orders, delivering plates, and filling drinks is worth only 2 bucks per person per meal, but the waiter may have a different opinion, especially if he is going to serve only 20 customers in a four-hour shift.
The restaurant tipping system essentially runs like some of the quaint vegetable stands I've run across in New England, where the proprietor lays out the vegetables, puts an "honor system" jar on the counter, and leaves, allowing customers to deposit whatever amount they see fit. Whether one particular shopper puts in a nickel or a twenty-dollar bill for a pumpkin doesn't really matter; but, if in aggregrate all the vegetables disappear and there's practically no money left in the jar, you can bet the farmer isn't going to bother to keep the stand running for very long.
We tip because everyone else does, and because it works out okay for both the restaurant owner and the waiter. It's silly and nerve wracking and, when trying to calculate the tip on a dinner for six after one too many glasses of wine, prone to grievous errors. But it's not going anywhere any time soon.
Periodically since then--especially when I'm out at a restaurant and about to calculate the tip--I think about that thread, and it still disturbs me . . . primarily, I think, because of the apparent lack of thoughtfulness and the extreme self-righteousness that most people display when they discuss the issue of tipping. And, perhaps most disturbing of all, this entire discussion occured on an economics-focused blog, where you would expect the author and his regular readers to approach things in a rational, businesslike way and look at all of the incentives involved in the exchange.
And so I'm going to recycle a lot of my original argument here in an attempt to get to the bottom of this phenomenon once and for all. Why, ultimately, do we tip waiters in restaurants?
In almost every case people trying to answer this question look at the incentives from only a single angle: that of the restaurant patron. Why does the customer tip? What's in it for him or her? To insure prompt service, of course. This line of reasoning invariably leads to people puffing out their chests and huffing about the level of service they expect in a particular type of restaurant and how much it is worth for someone to bring them an iced tea as opposed to filling it themselves from an urn on the counter. And this gets annoying really fast, especially to anyone who realizes that the average diner has as little insight into all the other things going on in a waiter's or waitress's job than the average waiter has into what their customers have going on in their personal life outside the walls of the restaurant.
The incentive for a customer to tip is one factor, but it's not the really important one. In one sense, we still have the seemingly-archaic practice of tipping because it's good for the restaurant owner's bottom line. Why, after all, are grocery cashiers paid by the hour, teachers on a straight salary, lawyers on salary with huge bonuses, and salespeople on commission? Over time, these compensation schemes have proven to be the most effective way for a businessperson to get the desired behavior out of a particular type of employee. In the case of waiters, a tip-based compensation model helps insulate the owner from taking a bath on a slow night--if not enough customers come in the door, the wait staff takes home a smaller amount of money. Waiting tables is very much a customer-facing sales position, and any waiter who has figured out how to upsell tables with appetizers and drink specials understands that tipping is essentially a slightly-unstable commission system.
Tipping works out just fine for the restaurant owners. If it didn't, and moving from a tip-based scheme to a flat hourly or salaried package would actually ensure better performance from the staff and higher returns for the restaurant from all the pleased repeat customers, you can bet your sweet bippy you'd see more and more restaurants posting "Please, no tipping" signs and paying their waiters a regular wage (like most grocery stores now do for bagboys).
But, the real key lies in the incentives for waiters or waitresses to work for tips. The federal minimum wage laws provide for a "tip offset", which allows a restaurant to pay its employees a greatly-reduced minimum wage of $2.13 per hour, provided that when they add in tips a waiter or waitress's total hourly take exceeds the minimum wage. From a practical standpoint, since a waiter at even a mid-priced restaurant can take home 30 or 40 bucks for a 4-hour shift, this means that waiters are working primarily for the tips.
Ultimately, it's the waiter's total take-home--and the opportunity cost--that matters. If the total wages and tips combined did not exceed what that person could reasonably expect to make in another line of work, then that person would likely move on to other jobs. From the restaurant owner's point of view, if the diners all suddenly turned into my step-father-in-law and started tipping only 3% on their checks, then likely many of the restaurant's servers would quit, and the owner would have to raise the hourly pay to attract and keep enough workers to run the business, which means labor costs would go up, and in the end the owner would have to raise the food prices to compensate--which means the diners would wind up paying for the service in one way or another.
Essentially, the waiter labor market is at an equilibrium where, on average, the amount of money the restaurant patron is willing to pay (whether out of conformity or guilt or pride or sympathy or whatever) is sufficient to supplement the tiny hourly wage paid by restaurant owners and attract enough people to serve as waiters.
So why do we tip? A commenter named Justin from David Friedman's site noticed an interesting fact about the tip jar on the counter of the coffee shop where he worked: "people tip more when there is a good deal of money already in the jar, and they tend not to tip much when it's empty." And why is that? The tip jar is a signal of the proper social behavior: Am I supposed to tip these guys for bringing me coffee or not--oh, look, a bunch of other people have tipped them, so that must be the right thing to do. I feel the exact same way at Andolini's Pizza, which has an "Instant Karma" jar on the counter that always prompts me to leave a tip even though there's not really any waitress service, just because I'm worried the people who work there will think I'm a cheapskate if I don't.
We tip because everyone else does. Would it make a difference if we all decided overnight that it's a silly convention and we weren't going to follow it anymore? I've heard a lot of ludicrously convoluted rationalizations for how people arrive at a tip amount other than the standard 15% (like timing out how long it takes a bartender to fill and deliver a beer glass and backing into the tip from a reasonable hourly wage), but amid all the seemingly-relevant detail these explanations universally ignore the fact that the customer and the waiter aren't negotiating before the meal and agreeing on a mutually acceptable price. Chest-Swelling Consumer Boy may think all a waiter's effort in taking orders, delivering plates, and filling drinks is worth only 2 bucks per person per meal, but the waiter may have a different opinion, especially if he is going to serve only 20 customers in a four-hour shift.
The restaurant tipping system essentially runs like some of the quaint vegetable stands I've run across in New England, where the proprietor lays out the vegetables, puts an "honor system" jar on the counter, and leaves, allowing customers to deposit whatever amount they see fit. Whether one particular shopper puts in a nickel or a twenty-dollar bill for a pumpkin doesn't really matter; but, if in aggregrate all the vegetables disappear and there's practically no money left in the jar, you can bet the farmer isn't going to bother to keep the stand running for very long.
We tip because everyone else does, and because it works out okay for both the restaurant owner and the waiter. It's silly and nerve wracking and, when trying to calculate the tip on a dinner for six after one too many glasses of wine, prone to grievous errors. But it's not going anywhere any time soon.
