Why does America have tipping?

Back in the days of Fifty Questions, a loyal MR reader asked:

I am interested in the economics of tipping.  This seems appropriate, since you seem to eat out a lot.  Why in the United States is the pay of waitstaff structured as it is as compared to elsewhere, where tipping is less expected? 

The best way to understand tipping is to go to a restaurant you will never patronize again.  Once your meal is over, when she is not looking, leave your tip not on your table but rather on another table she served.  That way she still gets her money and you have in no way ripped her off.

That is psychologically tough to do.  You fear the waitress will think you are a lout and a deadbeat.  Of course in no-tipping countries, or for that matter non-tipping sectors, this dilemma does not arise.

The real question is why America is structured so that waiters and waitresses can sell feel-good services ("you are a generous tipper and a fine man") to strangers, in return for money.  In other words, how did waiters end up as fundraisers, noting that the final Marshallian incidence may lower their wages by the amount they receive in tips?  Most cross-cultural explanations of tipping start with the agency problem between diners and servers ("can you bring my drink now?"), but I believe that is the wrong approach.  I view tipping as correlated with effective fundraising in other areas, and Americans as being especially willing to set this additional fundraising arena in motion.

Comments

Tipping is just a tax dodge. Empoyers paying staff badly to encourage tipping is a strategy to pay their employees in the most tax efficient way. In the US a large part of a waitresses pay is from (tax-free) tips. In Europe with minimum wage requirements waitresses get paid a salary (or piece rate), and tipping is much lower.

Are tips actually tax exempt in the United States?

Here is a barkeep in Cincinnati, talking about tips - less theoretical than here!
http://tavernwench.blogspot.com/2006_12_01_archive.html

I think tipping is some kind of corruption .

To me the economics of tipping are pretty straightforward: it's the only way to ensure good service. Service in France is famously horrible because service is included and tipping is not part of the culture, while in places like Israel and the US service is always good. In the US you sometimes get mediocre service, but never MEAN service the way you often get in Paris (and I'm French, so it's not an anti-tourist thing, it's just the way things are).

Here is a literature review
http://ideas.repec.org/p/wpa/wuwpot/0309006.html
by Ofer Azar
http://www.oferazar.com/
who has a bunch of papers on the economics of tipping

I'm not convinced that Americans are friendlier because of the tip.

All services (even those that don't provide an opportunity for tipping) are provided by Americans with friendlier dispositions. Call up HSBC with something they've done wrong & then call Bank of America or whatever with teh same problem, guarantee you that BofA will at least pretend to care.

A meal at a restaurant is a product. The producer (the owner) utilizes various inputs including labour in the form of waiters and cooks to deliver the finished product. Now, prosumably, consumers will only pay for the meal exactly what they think it's worth. But with the tipping system, they split the total payment between the bill and the tip.

If the VAT on a meal is, say, 16%, the tipping requirement is 10% of the value of the meal before tax, and the price menu of the meal (including VAT) is $100, for instance, then the diner ends up paying $108.62. The waiter earns minimum wage, which is say 5$ an hour. Assuming he/she serves some 3 meals in an hour, he/she pockets around $31 bucks every hour (but this can vary a lot from hour to hour, and night to night). The owner pockets $253.62, and pays the rest of the $300, or $41.38, in taxes, and $5 in wages.

Now, if we were to get rid of the tipping system, the owner of the restaurant could charge $108.62 for the meal, including VAT. He would take in $326, pay $45 in taxes, and pocket $281 before paying wages. Now, he has to pay salaries considerably higher because waiters are not getting tips. If he compensates the waiter/tress by paying him/her a higher salary, (slightly below what he/she would make on tips plus hourly $5 wage but not so far below that he/she wouldn't be willing to work; say $25 an hour) he still walks off with $255.9, or $2.3 more dollars every 3-meal hour.

I would think it would be sensible for a risk-averse waiter/tress to take the cut in pay in favor of a steadier income. Then the owner would be assuming the risk; if business is good enough that, on average, he'll get 3 diners per hour per waiter every day, it makes sense to drop the tipping system. Otherwise, and I think most restaurants are in this position, it's better to have tips.

I'm sure I made a terrible mistake in calculation somewhere, so please correct me, and I'm also ignoring the fact that dropping the tipping system could undermine the quality of service, and thus hurt the booking rates of the restaurants, thus forcing the owner to re-institute it.

You pay the restaurant for the food and the waiter/waitress for the service. At leas that is how I have always approached it.

The tax explanation is interesting, but it would predict a higher expected tipping rate in countries with higher payroll taxes than the U.S., which is not observed.

Tipping as fee-for-service is interesting, but why then is tipping calculated as a fraction of the total bill, when presumably the quality of service does not scale linearly with the price of the food. And personally, I have never experienced service so bad that I felt able to not tip.

Tipping as a singal fits with my experience, if the primary audience for the signal is one's self. We tip in order to feel generous in a culture where many kinds of generosity are socially awkward.

jp said: "The interests of waiters and employers are not perfectly aligned, with the result that the waiter could "cheat" the business in order to extract a bigger tip (e.g., persuading the cooks to provide "free" appetizers for repeat customers)."

Having worked as a cook in a relatively pricey (for the area) restaurant with lots of repeat business, I can attest that this happens /all/ the time.

Tyler, it's not just that the waiter/waitress will think you're a deadbeat. It's that you could *ruin his or her day*.

Do you think the waitress's happiness at the end of the day is a rational, linear function of her total tips? No; if you do your experiment, she'll find one unusually big tip (happy) and one missing deadbeat tip (unhappy). Thanks to negativity bias, that's an overall bad day. That (I say, trying to imagine myself as unselfish) is a better reason than shame to not dodge tips.

Australia and New Zealand are English-speaking countries in which tipping usually does not occur. In my experience, the service in those countries is just fine. I much prefer their system to the "everyone has his hand out" one in the US.

I've seen a few personal ads from women saying that they kind of guy they're looking for is a good-tipper.

Hahahahahahaha!

Good one!

This is where we learn the difference between what women (and people in general) say they want, and what they really want.

That strategy will simply make you poorer and lonelier.

I traveled to New York with a a couple Italian colleagues. We ate at a quite nice, trendy, and fairly expensive restaurant. The food was just okay, but our table was terrible and the service left alot to be desired. My colleague and I were clients, so the other guy was paying. We were all aware of the tip. But the payor suggested to us he was going to leave no tip (I'm guessing it would have amounted to around $50 or so). I'd never done that before, even with lousy service. So, my eyes shot up, but I thought, what the hell - why not?

Well, let me tell you why not, because the restaurant manager/owner confronted us as we were leaving and was very insulting. I was surprised by how vociferous and aggressive he was. Personally, as much as I think he over-reacted, that was the day I learned that tipping, in fact, is obligatory, and it seemed to be much more telling of us (that in fact we were dead-beats) than it was a commentary on the service (which was poor).

Tipping saves restaurants management resources by shifting the burden of evaluating an employee's performance from the management to the client.

Chris Malloy is right on target about many of the incentives that tipping provides for waiters and restaurant owners. But evaluating your service on a scale of 1-10 when you sign your check would certainly be more efficient for customers than calculating a percentage based on how effective the service was.

Unfortunately, the practice is proliferating in this country (I've seen tip jars at self service counters at Subway and Starbucks). But the next time you're at dinner with friends, try discussing the idea of tearing down this American institution and you'll soon feel the wrath of anyone who has ever waited tables. Maybe that's it's self-perpetuating - because a large percentage of Americans have held the job at one time or another.

If tipping is for service why is it a percentage of the bill and not a fix amount to have a meal served? Does the highest and the lowest priced menu items require a different level of effort to serve?

Menu items don't require a different level of effort to serve, or at least the difference in effort is only weakly correlated with price. (more menu items or more people means more effort though).

But the effort required at an expensive place probably does not scale with price. Which is why waitstaff at expensive or very fast moving restaurants make a lot more money.

I think the risk transfer theory is significant. It's very hard for me to believe that certain waitstaff would make as much money as they do if tipping were not normal.

Do servers at fancy restaurants in non-tipping countries who work full-time regularly make a solid middle class income? (at or above the median). My SIL went from being a waiter and bartender to working in kitchens (while going to restaurant school to become a chef). The first job where she made more money than when she serving was as the chef/GM at a 5mil/year revenue restaurant. Before she got to sous-chef level, she would moonlight as a server to make money.

Anyway, in payment for dealing with risk and class issues, good waitstaff in efficient or pricey restaurants make much more money than they could in comparable skill jobs.

I agree with the previous posters who suggest that tipping is an easy and relatively cheap way to monitor quality of service.

I've also wondered if tipping is a way for restaurants to hire attractive servers, who customers certainly prefer, without explicitly discriminating against unattractive people. It may be hard for restaurants to explicitly not hire unattractive people or pay unattractive people less. But it is certainly easy for restaurants to let their customers tip unattractive people worse. The correlation between appearance and tips might be substantial enough that, in equilibrium, few unattractive people find waiting tables to be the best available job option. It would explain how nearly all waiters are better-looking than average, especially at expensive restaurants at which tips probably make up a larger component of each server's take.

What I find interesting about the discussion here is that it is about tipping waitstaff. Waiters and waitresses are not the only people in the US who receive tips.

As well as other food-bringers, such as pizza delivery folks or room service folks, there are taxi drivers, doormen, and, I'm sure, others that I can't think of off the top of my head.

Perhaps the issue could be made clearer if we expand the discussion beyond restaurants?

Why do I tip the pizza guy but not the UPS guy?
Why do I tip the doorman at the hotel if he gives me directions, but not the gas station attendant?

And, on the restaurant topic -- how does the common "gratuity included for parties of eight or more" factor in?

Anyone living in an apartment in NYC knows well the perils of under-tipping. What constitutes under-tipping is obviously up to interpretation, which makes for some interesting interactions - verbal and nonverbal - around the winter holidays.

Cure, the Chinese are just responding to culturally illiterate Americans. Yes, if you leave a tip at an average restaurant, the waitress will chase you down the street to return your money, which you obviously forgot on the table. Have you seen any Chinese tip at the high end restaurants? My guess is they're not, because I never saw it.

I am a waiter at a very large Italian restaurant. Give you two guesses as to which one I'm talking about. I look at waiting tables like this. Waiting tables is akin to being a small business owner. The restaurant supplies the infrastructure and inventory (facilities, food, support staff, advertisement etc.) which provides a clientele that the servers depend on to make money. At the end of the meal, the patron pays the bill. The server in turn pays the restaurant for the food and drink and keeps the margin, which we call tips. The server has to tip out his support staff as well. This consists of bussers, bartenders, and sometimes hosting staff. This is an added cost of doing business.
People who become servers don't think of it like this for the most part though. People are drawn to these positions (as was I) by the fact that you can make upwards of $17 to $25 per hour. The risk-reward profile is much better than my golf course job that paid $6 per hour.
This is how I look at tipping. It has definitely been promoted by restaurants as a means to pay their employees a lower wage (my "wage" is $2.13 per hour). Servers are drawn to these jobs because of the relatively good pay. A server's perception of the tips he or she receives is based upon tradition. People have always tipped 15% so that's how it should be. I find though that I expect more out of people. I have had experiences where I have two similar tables with similar bills, with both tables receiving similar service. One table may leave 30% while the other leaves 18%. Over time, I become unhappy with people leaving less than 18% or any other arbitrary number. The point is that tipping is a tradition that has been promoted over generations. Server's expectations of good tips have helped ratchet up the percentage that people tip over time. Nobody wants to look like a scumbag, so as time goes on tips continue escalating.

Another thing I want to point out is that the tip a waiter receives is not to ensure good service ex ante. Rather, the expectation of tips from a table at the end of a meal helps to ensure that service should be good. This creates a free-rider problem where servers expect a decent tip at the end of a meal, and those that refuse to tip are receiving the good service without having to pay for it at the end.

It would also be interesting if it were possible to look at the economic effects of server's spending compared to other's spending. This would examine the effects of taxation, since it is true that servers underreport their income drastically compared to other occupations. This would be difficult task because you would have to seperate their demographic distributions, take into account that most servers are college students, etc. I just think it is an interesting thought experiment on whether or not servers provide a real life example of the benefits of lower real taxation.
In summary, tipping has been propigated on the public as an obligation. Restaurants like this. Servers have come to expect it. There is no exact science on what a good tip looks like. It is all arbitrary.

At restaurants I eat at I like to leave what I consider above average cash tips on the table rather than paying anonymously on the charge card. I think it helps create a better level of service and attention on subsequent visits. I like them to know me when I go to a place and cash tipping is a reason for them to remember you.

Now I'm a pretty undemanding and friendly customer, but I _never_ get bad service at restaurants where they know who I am. I'm telling them I'm the kind of customer that they want.

This doesn't explain tipping at places where I rarely eat, but to some extent tipping isn't solely a signal to make me feel good about myself. I expect a payback.

Oh, and if you read the Section 26 (the tax code), it turns that except for what's essentially a few enumerated exceptions, anything you (or its equivalent in money) counts as taxable income.

I tip 20%+ cash (rounded up to even dollars) at places I frequent. I never have to wait. I get the same waiters, who mysteriously remember I don't like to sit under the A/C and take extra lemon with my tea.

The waitstaff act as my agents. I like the tipping arrangement, because they realize that I, not management, am the one paying them.

Harald -- Try thinking of tipping not as a response to begging but as a performance bonus. Part of the waiter's pay is provided by the restaurant in advance, and part is provided by the customer afterwards according to how well the waiter performed. Lawyers and investment bankers often have similar arrangements: we agree to be paid x just for doing the job, and we get additional pay of y if, for example, the deal closes or the lawsuit is resolved in our side's favor.

You don't need such an experiment: compare service in Europe (or most other places in the world) with that in the US.

I find service in other countries to be on par with US service. Sometimes better, sometimes worse, but on average comparable.

i think tipping like consumption tax distorts prices and consumption patterns. at the point of purchase presumably the bounded rational consumer only factors in menu prices, then the bill comes and they realize they have to calculate another 10-20%.

Some restaurants in some states (California go figure) have higher minimum wages for servers. I have heard that California employees of the restaurant chain I work at make $8 an hour plus tips where I make just over 2.

I found this article to be quite interesting. I think it is interesting to note that it is not always possible for waiters and waitresses to make up the wages that they are shorted because they receive tips. Tips given at high-end restaurants may make up for the difference, but as a former employee at a barbecue restaurant, I witnessed waitresses that did not earn money at the minimum wage level. These young ladies were basically gambling with their jobs because they never knew if they were going to have a decent night. I believe that employers usually get the sweet end of the deal in this situation.

I haven't read every single comment. I have reached a position in my restaurant where I will just add 18 percent
to the check if I feel there's a danger of me getting less money. I have no qualms about doing so as I always give top notch service. If I feel the service was sub standard for something that was my fault, I will not add it.
I would rather have the customer tip me correctly (20-25 percent+) than add this gratuity -- because while I do most of the labor, I still lose 5 percent of my overall sales to the busboys, food runners, and bartender.
If I put the 18 percent on and the customer does not leave me anything additional..I only make 13 percent on that check. If the customer were to leave me 15 percent or less...well you do the math..it's not pretty.
I can't speak for ALL waiters...but I'm sure most would agree with me in saying that we would NOT wait tables if it paid ourely $10 or less an hour. We wait tables so we can make $20-$50 an hour from the tips! Plus at least where I work we take home cash every night and hence are always being paid!
Tip your waiter 25 percent! Thanks!

I think the tipping policy in USA is 'officially begging'. I was asked by a waitress why I paid only 10% and not 15% and if there was anything bad with the service. If there was anything bad I would not have paid 1 cent too.
It employers do not want to pay their employees so they want money from them. If the waiters want to earn more why the hell dont they go to school and study and get some other job. How the hell should they expect to earn 20-30/ hr but serving people. Go to school guys and study. Education looses its importance because of these idiots. Then they say jobs are outsourced if US has so many waiters earning 20-30/hr why will get go to school and who will companies like microsoft pay to?????? Outsource obvuosly and not pay 50-60/ hr to a waiter.

What I think is funny is that in California, waitresses and waiters by law are paid minimum wage, period. Tips are an additional income. I remember back in the day when I worked as a hod carrier and making $8.00 busting my a** in the rain and cold in winter and the 100 degree heat in the summer. But my girl friend could make $200 a night as a waitress at Denny's plus her $5.00 hr minimum wage. And then if I wanted to take my girlfriend out to a nice dinner I was expected not only to pay the ticket but give someone who wrote down what I wanted on a piece of paper, brought me some drinks, and then brought me my plates (all of which took no more than 10 minutes of their time) a tip that cost me 2 hours of hard work. And that doesn't count the other five tables that she waited on it that time and that were expected to leave her a nice tip. No offense, but being a waitress is not an extremely hard job that deserves $20-$30 hr. I know from experience as I have helped out a friend who owns a bar and grill and worked 10 hour shifts during dinner rushes. It doesn't take great physical shape or a rocket scientist to bring drinks to a table and carry a few plates of food. I am not saying it is not work and your feet don't hurt after hours of running around... but a waitress doesn't need an education or special training to do her job. But she can make a lot more money from tips than the average laborer... and that is all a waitress really is. No waitress has ever worked harder than I did at some of the jobs I have worked at when I was younger and no one was giving me a tip over my minimum wage. On average a waitress can make well over $1000 a week in tips not counting her minimum wage at $8.00 in the state of California.

Have you taken a look at salaries and wages recently? A person with a BA in accounting can find a job for $10.00-$15.00 hr as a bookkeeper. But a waitress can get $30-$50 hr carrying a few plates and refilling your soda. Yeah, makes a lot of sense.

And this crap about better service? Really? I would say service in most restaurants is terrible. And I used to be a BIG tipper, usually 50% of the check and if it was a small ticket such as $15.00 at a local cafe, I would leave a $15-$20 tip. It always seemed the servers thought it was more owed to them than something to be earned. So I started cutting back to where I hate to tip now.

One last point..... I go to a bar every Monday for a poker league. I only get water most of the time but when I first started going I tipped the waitress $3.00 for getting me the water and $1.00 every time she refilled my glass. It was an expensive water as I would tip as much as $10.00 for the night. My hope was that by tipping her every time, I would get better service and would not have to chase her down. HA! Most of the time she just stands at the bar waiting for people to come to her. So I joined another league at a different bar.... same thing, I always tipped. But this waitress always seems to be talking to her friends and you have to chase her down to get a drink.

So really, is tipping something people really think is required? Maybe we should rethink who gets tipped in America? I would prefer to start tipping people like the grocery clerk who helps me take my groceries out to the car in the rain or the guy at Home Depot who helps me find the materials I cannot seem to find in the store.... but a waitress who thinks I owe it to her and I have to constantly work at just getting service doesn't deserve to be tipped.

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