How to tip more effectively

That is the topic of my latest Bloomberg column, here is one part of the argument:

Consider a scenario in which the initial effects of tipping are self-reversing — that is, wages will fall to offset the value of tips. If the official wage is $10 an hour and tips are on average $10 an hour, that adds up to $20 an hour. If tips from everybody — not just you, but everybody — go up by another $3 an hour, the new net wage is $23 an hour.

At that higher wage, more people will apply for the job. The increased supply of labor will allow the boss to pay less than $10 an hour; it might suffice to pay only $7. Under the new regime, with tips at $13 an hour and the formal wage at $7 an hour, $3 per hour has essentially been transferred from customers to restaurant owners. The workers don’t end up with any extra money, but the owners have snookered the customers into paying a higher share of the wage bill.

In this case, you would do better by sneaking an individual worker some money on the side. That way, at least one person would get some extra cash, while you would avoid being part of a system that results in less burden on the employer.

Note that during a labor shortage, as we currently are experiencing in many sectors, part of the benefit of tips goes to customers.  The higher net wage pulls more labor in the door and improves service quality.  And here are the conclusions of the piece:

• If it is only you who is tipping more, and not all customers, the gains probably go to the worker.
• For that reason, if you are going to tip more, give cash to an actual human rather than in response to a touch-screen prompt.
• If you want to give a collective tip, under normal conditions you won’t much help workers.
• Under abnormal conditions, which currently prevail, even a collective tip is more likely to reach workers, as well as attract more labor to the workforce and help your fellow customers.
• In the longer run, however, a collective tipping system will serve to transfer some of the wage burden from employers to customers.

Don’t forget general equilibrium incidence!