A top New York restaurant is replacing tipping with a mandatory twenty percent service charge. In many other areas, such as hotels, tipping is declining as well.
Most economic analyses of tipping ask why so many customers will give up money for no apparent return. Put this puzzle aside, and ask why an establishment might move to the fixed charge.
Ralph Frasca explains the legal difference between a tip and a service charge. The employer may legally keep the service charge but not the tip. This suggests at least three hypotheses:
1. A restaurant is using the new service charge to raise prices. One of the new service charges is set at 20 percent, which is more than most people tip. (Do note: this one particular New York restaurant claims they wish to redress the distribution of tip money in favor of the kitchen and away from serving staff. Furthermore the restaurant is fancy, and some customers do tip 20 percent or more there.)
2. The balance of power in labor markets is shifting against workers. We therefore see owners trying to capture tipping income. Some of this income will be given back in the form of higher wages, but some of it will be kept by owners. Perhaps this is the most palatable way of rewriting the implicit labor-management contract.
3. Employers can monitor waiter/waitress quality better than before. So why leave compensation in the hands of the customers? Under this hypothesis, employers are not looking to capture tipping income, rather they seek to control it by their own standards.
Addendum: One ranting waiter notes: "Experience has shown that customers use verbal praise to supplement a poor monetary reward."