Tip Credits and Employment

Tip Credits and Employment in the U.S Restaurant Industry

  • William Even, Miami University
  • David Macpherson, Trinity University

This study uses two different government datasets to examine the impact of states reducing or eliminating their tip credit—a part of labor law that allows tipped employees to be paid a lower cash wage as long as they earn at least the minimum when tips are included.  Restaurants, which only keep about 3 cents in profit for each dollar in revenue, are faced with difficult choices when labor cost rises and the increases can’t be passed on to customers averse to higher prices. The authors find that each 10 percent increase in the base wage a tipped employee must be paid reduces their hours worked by about five percent, as restaurants either reduce the number of servers per shift or move toward customer self-service (i.e. technology that lets you pay at the table).