Tipping is the Bane of the Service Industry

Last weekend my wife and I went out to dinner. We have been to this restaurant on numerous occasions and generally have a good meal in a pleasant atmosphere with friendly waitstaff. Not so Friday. The waitress was terrible. I don’t mean inexperienced, she was so bad I looked around for cameras to see if this was some kind of set up for a comedy skit. It wasn’t. I could list the things she did wrong but it would be quicker to list those she did right – nothing. And the kicker was we sat for half an hour after our meal was served and consumed waiting for the check. I finally got up and went to the front stand to ask them for our bill. No one was at the stand and our waitress happened by at that moment so I asked her for our bill. She first asked which table was ours and then she said she didn’t have everyone’s bill and I would need to point out our waitress. I told her that she was our waitress. She shook her head and started through her order pad and kept shaking her head. She had no idea who we were. I finally told her what our order was. She pulled it out. I gave her my credit card, she ran it and slapped it down on the counter and left. I stiffed her. No it was more than that; I zeroed out the line for tipping and wrote “Terrible Service.” I did that so that both she and the management would know why she got nothing.

Now, most people who are less quarrelsome than me would have grumped, added the twenty percent gratuity and snarled at their spouse on the way home about the whole meal and particularly the waitress. So if you think this is mean spirited you probably ought to stop right here because it is going to get a lot worse.

It isn’t that poor service is the result of the “tipping regimen.” The fact is that everything is wrong with the tipping regimen. Tipping began as a means of identifying and rewarding good service. Over the years it became so ingrained in the dining public that tipping (gratuities) became “mandatory.” Not only mandatory but a means of raising the price of dining without raising the underlying price for meals. It went from 8-10 percent, to 12-15 percent and then from 18-20 percent. Somewhere in there, the “gratuity” began to be calculated not on the price of the meal, but rather the price of the meal PLUS the sales tax, entertainment tax, or whatever else is added on to dining by various communities. Now, if your look at the “recommended” tipping (gratuities), it runs from 20 to 30 percent. It has become so pervasive that fast food joints, including coffee shops, expect “gratuities” even though service is confined to handing you your order and accepting payment. But that is just the annoying part.

The real problem is that tipping has allowed dining establishments to shift a significant part of the responsibility to pay a living wage to the consumer (diner). Let me give you an example. Let’s assume that the average wage for a waitress was $7.25 per hour in 2010. (In actuality it was substantially less than that assuming the waitress received more than $30.00 per month in tips.) Be that as it may, let us likewise assume that the average tip in 2010 was 15-18 percent. And during that period of time, the cost of living increased at an average rate of 2.75 percent (compounded annually) for a total of 24.75 percent over the ten years. So rather than increase the average wage by 24.75 percent to about $9.05, management increases the “suggested gratuity” to 20 percent – no additional cost to them but an increase in gratuity revenue to the waitstaff – presumably. Everybody happy?

No so fast. That probably holds true so long as the cost of living increases are moderate, the restaurant business continues to expand, and consumers remain placid about the rising “expectations” for tipping. But along comes COVID-19 and throws everything in to disarray. Restaurants close, restaurants operate at reduced capacity, and restaurants shift to “take out” – all of which disrupt the model that assumes a 20+ percent gratuities provided by customers will make up for the lack of a living wage paid by the employers (restaurants). Now add to that the Biden inflationary explosion where consumers can afford less, followed by rising discontent over a “mandatory” 20+ percent gratuity regardless of the level of service and the “increase” in assumed level of gratuities is pared back. Does the restaurant suffer? No! But the waitstaff does. (As an aside, restaurants assume that the rising level of gratuities will also correct poor service by waitstaff but it doesn’t and it shouldn’t. Training and management of waitstaff is the employer’s responsibility, not the diner’s. Not only have restaurants shifted the burden of paying a living wage for its employees but many have likewise relaxed their managerial responsibilities for good service.)

But that’s not the end of it. The tipping regimen creates a distortion in the compensation regardless of performance since it is based solely on the price of the dinner (that price now including the attendant taxes). Let me give you an example. My wife and I frequent a small restaurant near our house in Bend. They have good but not spectacular food. They also have plentiful outdoor dining which we enjoy during the summer months. We were not particularly hungry and so we split a sandwich and added a beer and a soft drink. Our bill was about $29.00. The people at the next table over were younger and more robust than us. He had a steak and she had fish and chips. They each had two cocktails. Their bill was north of $80.00. With the exception of having to bring a second round of drinks to their table, that couple required and received just about the same level of service that we did. Our tip at twenty percent was $6.00 ($5.80 rounded up). Their tip at twenty percent was at least $16.00. Same level of service delivered, same degree of difficulty and same level of training with wildly different results.

In either instance the economics of the tipping regimen are wildly skewed and much of the burden for a living wage is shifted to the diner rather than the restaurant. A far better regimen would be for restaurants to ban tipping or gratuities and take sole responsibility for paying their employees a living wage. And while the restaurants may have to raise prices to cover the increased wages, it is unlikely that customers would be burdened because, in theory, the price increase would be no greater than the current prices plus “mandatory” gratuities. It is a practice followed in many European locales and there are a growing number of restaurants that are likewise opting for such a regimen with the idea that with better pay they can attract the best in waitstaff.

In the end this is an example of when capitalist are every bit as ready to distort sound economic reality as are the socialist. In every such instance the results are market and wage distortions.