The case for tipping, or not

Published Oct 25, 2015

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Washington - If you happen to have a late-November reservation at the Modern, Danny Meyer's two-Michelin-star restaurant in New York's Museum of Modern Art, here's some good news: When the bill comes, you'll no longer have to do any fuzzy math on a full stomach and a few glasses of champagne.

Meyer, head of the Union Square Hospitality Group, announced that he is eliminating tipping at his full-service restaurants, beginning late next month.

Unfortunately, there's some bad news, too: Meyer's initiative, which he is calling Hospitality Included, will raise prices 20 to 35 percent. So that $138 (about R1 500) tasting menu could soon cost about $170.

The new policy will be rolled out at all of Meyer's restaurants in the next year; Shake Shack, his fast-food chain, will not be affected by the change. But as the restaurant industry begins to rethink the way its employees are compensated, the no-gratuity business model may catch hold elsewhere.

Though Meyer certainly isn't the first restaurateur to eliminate tipping - restaurants such as New York's Dirt Candy and Chez Panisse in Berkeley, California, have already instituted service charges instead - his 13 restaurants will set a high-profile example for others in the industry struggling to retain an often low-paid staff.

That's because the reasons for eliminating tipping go beyond just sparing diners an arithmetic problem when they're a little tipsy. Tipping is an unequal system by which servers can make more than three times what highly trained cooks preparing the food earn, even though a waiter's base minimum wage is less. That's one of the primary reasons Meyer says he is doing away with the practice.

“We believe hospitality is a team sport, and that it takes an entire team to provide you with the experiences you have come to expect from us,” Meyer wrote in a statement. “Unfortunately, many of our colleagues - our cooks, reservationists, and dishwashers to name a few - aren't able to share in our guests' generosity.”

He put it in starker terms to the website Eater: “I hate those Saturday nights where the whole dining room is high-fiving because they just set a record, and they're counting their shekels, and the kitchen just says, 'Well boy, did we sweat tonight,'“ Meyer said.

To be fair, tipping can also be unjust to servers, whose livelihoods depend on the whims of hard-to-please guests. For every $10 000 windfall, there's a night where a waiter gets a foreign tourist unfamiliar with American tipping customs who leaves nothing. Which in turn can lead to servers fighting over tables they see as big spenders and stereotyping minorities and international guests, whom they perceive to be poor tippers.

You may think that tipping motivates good service, but in fact, the correlation is murky. Michael Lynn, a Cornell University professor of consumer behaviour and marketing who studies tipping, has found that the amount of a tip isn't what motivates waiters - it's the number of tables they can serve in a given night. But when Lynn compared Miami restaurants with a conventional tipping system with eateries that have a flat service charge, he found that diners considered their service to be better at the tipping establishments. Apparently, the suggestion of a link between tipping and service is enough to influence both diners' and servers' perceptions.

Meyer has eschewed a service charge, building the cost of labor into his menu prices. It's a risky move that could turn off diners. And it could deter servers, too: Many servers at high-end restaurants prefer tips because they can make much more money. Plus, there's the transparency of tips: Tipped wages are legally protected, and though servers may choose to pool their tips with busboys and other front-of-house staff, that money can't be touched by owners or cooks. Meyer says he's working on a transparent system that will keep his servers' wages the same, or better, but many longtime servers in the industry fear the loss of that protection against wage theft.

Saru Jayaraman, co-director of Restaurant Opportunities Centres United, a group that advocates for better wages for restaurant workers, applauded Meyer's decision in a statement, saying it “sets a powerful example for New York restaurants and beyond.”

“Dignity and profitability are not mutually-exclusive ideas at America's restaurants,” said Jayaraman's statement. “Eliminating the two-tiered wage system is essential to ensuring a fair and just future for the nation's 11 million restaurant workers.”

Whether diners will find it fair remains to be seen. And if not? They'll always have Shake Shack.

Washington Post, Maura Judkis

 

Tipping is strange . . . and hard to get rid of

The New York Times suggests that Meyer's no-tipping move will lower the disparity in pay between the back of the house, which makes an average of around $12 an hour, and the servers, who pull in considerably more than that.

Meyer is part of a small but interesting movement among restaurants and bars. A bar without tips just opened near my house in Washington; New York has a few places that no longer support tipping. Prices will naturally have to rise to reflect increased labor costs. Meyer says that servers' incomes will not fall, but I am sceptical on this point. But it will certainly be interesting to see if Meyer manages to slay tipping -- and if so, whether other restaurants will follow suit.

To get a sense of whether this is likely to work, it seems worth asking: Why do we tip? Tipping is, after all, a rather strange custom. We tell ourselves that it exists to ensure good service, but in fact, most people are very reluctant to undertip even when the service has been appalling. They follow the norms of tipping even when they are never going to see that waiter again, and therefore don't need to worry about retaliation. Meanwhile, all sorts of things seem to affect tipping that have nothing to do with the quality of the service, like the race of the server and whether they put a smiley face on your check (though apparently this only works for female servers).

It's evidently possible to run a service industry without lavish tips, because many places in Europe don't tip, or don't tip on anything like the American scale. I'll never forget the evening that a German acquaintance, in possession of a lavish financial-industry bonus and an impromptu ticket to New York, took me on a tour of the city's more luxurious hotspots. It was only at the end of the night, when he didn't tip the coat-check girl, that I realised that we must have left a trail of fury behind us all evening. Another friend claims that in Sweden, a lovely teenage server once ran out of a restaurant and chased him down -- because he'd forgotten his money on the table.

So if it's not about rewarding good service, why do we tip? Notice that we do it in some circumstances, but not others. We tip the bellhop, but not the clerk at reception. The waitress, but not the person behind the Target checkout counter. These disparities offer our first clue to the mystery: We tip people who are providing the services that used to be performed by household servants, but not the people who do the jobs of tradesmen or retail clerks. It's possible that this grew out of the old tradition of tipping servants when you went to stay at someone's house.

But that only gets us so far, because it doesn't explain what purpose this ritual serves. The most promising theories of tipping are as follows:

*It is about envy. In a 1972 paper titled The Anatomy Of Envy, anthropologist George Foster argues that tipping functions the same way that gift exchanges worked among our hunter-gatherer ancestors. In small communities, people who have better fortune or success than others are targets of envy. The targets of envy use gifts to mitigate those feelings, lest their neighbours decide to destroy the object of their covetousness. This may explain why the custom seems confined to relatively intimate services, which maximise the discomfort of having more than someone else.

* It exploits pricing irrationality. The true cost of a meal is the price of the food and drink, plus the tip you will feel honour bound to leave. But people aren't necessarily so good at doing those calculations. In the same way that airlines lure you in with a cheap fare and then pile on costs for baggage and food, restaurants may maximise their revenue by declaring a lower cost for the meal, and then having customers pay the wait staff separately. This is why restaurateurs are afraid to move away from the tipping model; they're afraid they'll lose customers who do not view a $20 meal with a $4 tip the same way they do a $24 meal.

* It's tax arbitrage. Tip income is supposed to be declared on your taxes, but - I know this will shock many of you - it often isn't. This saves restaurateurs their portion of the payroll tax, and allows servers to enjoy a healthy dose of tax-free income. The benefits of this tax arbitrage have been disappearing as credit card tipping has become ubiquitous, and this theory would predict that the rarer cash tips become, the more we'll see a move away from tipping.

* It gives servers higher average incomes, at the cost of more volatility. Serving is somewhat feast or famine. At an ordinary restaurant, the difference between what you make on your slowest night and your best could run 100 percent. In general, you have to pay people to accept more income volatility, which may explain why wait staff make so much more than people in the back of the house. For young people without a lot of fixed expenses, this is a relatively attractive deal.

Given these theories, what should we expect from a move away from tips? The obvious one is that prices will go up somewhat, while I'd expect server income to fall, especially after taxes are taken into account.

Now, a very successful restaurateur like Meyer, who fills his tables pretty easily, may be able to negotiate that transition. He'll have a decent margin to increase server wages, and many of his customers probably aren't terrifically price sensitive. He may even attract customers who prefer not to think about tipping, and servers who prefer a steadier wage.

But across the industry, this transition will be harder. Many people make a habit of checking menu prices before they book a restaurant; they may not notice that the price includes service, and may therefore decide to go somewhere else. Entrenched customs represent a social equilibrium, and moving away from that equilibrium is difficult to do on your own.

Waiting tables will probably become a somewhat less attractive job as taxes rise and wages fall. And I would expect the quality of service to decline somewhat, because tips are (very slightly) related to the customer's experience. Waiting tables is a job that's easy to do badly and comparatively difficult for managers to monitor. There's a reason that those sorts of jobs frequently pay on commission.

Many people argue that tipping is inefficient and offensively paternalistic. But even if you agree -- heck, even if a majority of your society agrees -- that doesn't mean it will be easy to switch to a better model. Doing so will require resetting a lot of expectations all at once.

Entrepreneurs do occasionally succeed in changing industry business models, even ones as ubiquitous as tipping. But this is bigger than a business model. Others have tried before to change powerful social equilibria. Few have managed to, er, tip the scale.

Bloomberg News, Megan McArdle ·

 

PRO TIPPING COMMENT

Tipping's hidden benefits for servers and customers

If you want to get economics pundits excited, bring up the issue of tipping. Most of my fellow pundits despise tipping, the way they despise the electoral college and the penny. Well, the pundits are sure to be rejoicing: Danny Meyer's Union Square Hospitality Group, which runs more than a dozen restaurant chains, just said it will eliminate tipping at all of its establishments.

The end of tipping would bring American restaurant culture closer to the global standard. But the celebration in the press may be premature. The issue of tipping is a lot more complicated than it seems, and it isn't clear that its death would be a good thing.

Basic economic theory gives us several reasons to like tipping. First, tips are under the table, which allows restaurants, servers and customers all to dodge a little bit of taxes. Since taxes distort the economy to some degree, theoretically this means that tipping increases efficiency. Of course, it's unfair to allow certain types of businesses, such as restaurants, hotels and taxicabs, to selectively evade taxation.

Another good thing about tipping is that it can make minimum wage laws less burdensome. Federal law allows restaurants to pay a lower minimum wage, a break known as a tip credit, if wait staff are expected to make up the difference in gratuities. When economists looked at what happened when the tip credit was decreased, they found that employment went down for servers. So the end of tipping culture will mean minimum wage laws take a bigger bite out of employment. That is something to think about as the nationwide campaign for $15 minimum wages gathers force.

A third reason to like tipping is that it can be used as a reward for good service. That would be a form of pay for performance -- customers would give bigger tips to better wait staff, which would incentivize better service and draw better servers into the industry. The trouble is, both casual experience and data suggest that tips are pretty random and unfair.

Most of the tips we leave are determined by social convention. In the past, the standard was 15 percent. These days, it's 20 percent. That number has nothing to do with how good a server is. In addition, percentage tips are grossly unfair, since it pays lots of money to a server at an expensive restaurants and very little money to one at a cheap restaurant, even though these two servers often provide exactly the same quality of service.

Tips are also affected by random factors such as whether the customer is paying by cash or by credit or debit card. For these reasons, many economists claim that tip size is only very weakly related to the quality of service.

So tips may seem unfair, but probably give the restaurant industry - and wait staff employment - a boost. But here's where things get complicated. Tipping also probably has a number of effects that are not captured by this tradeoff, or by standard economic theory.

Economists typically assume that when you pay for a service, the way you pay doesn't make a difference to you. That assumption is probably wrong in the case of tipping. When customers leave a tip, they often get a sense of satisfaction from the idea that they gave money directly to a poor, hard- working person instead of to a big faceless corporation. Many of us like knowing that some of the money we pay will go directly into the server's pocket, instead of going through the vast, complex machinery of corporate accounting.

Econ 101 just doesn't deal with the personal bond that buyers and sellers can feel as the result of a transaction. But in the real world, that can make a big difference. Research shows that servers who draw smiley faces on checks get higher tips. Those customers aren't tipping for a smiley face -- they're tipping because it feels good to pay money to another human being with whom they feel they have shared a personal interaction.

I believe that economics has made a big mistake by ignoring the utility humans get from the method of exchange. Tipping is just one tiny example. Personal relationships between sales workers and customers, or between purchasers and suppliers, or between bosses and employees, are emotionally important to us. A huge amount of economic activity is probably driven by that emotional importance. There's no reason economics couldn't take that into account, but it's almost always ignored.

So I think tipping is a more complicated phenomenon than the pundits believe. Standard economics simply doesn't give us the answer. The real solution is for some businesses, such as Union Square Hospitality Group, to experiment with no-tip service, and see whether customers like it.

* Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for finance and business publications.

Bloomberg · Noah Smith

 

THE CON ARGUMENT

No tipping means more great restaurants

The decision of New York restaurant owner Danny Meyer to eliminate tipping in his establishments goes against the American tradition; but, if it's more universally accepted in the US, it might give consumers something to cheer about.

Of all the countries with Michelin-starred restaurants, waiters in the U.S. probably have the highest tip expectations. I've checked dozens of sites describing customary tipping practices throughout the world, and nowhere else is a 20 percent tip the social norm. It's why European waiters smile so broadly when they see an American tourist walk in -- and why American waiters are not so fond of European visitors.

The U.S. has a bizarre government-imposed system that bans servers from sharing tips with cooks, dishwashers and other staff who do not interact with customers and at the same time allows restaurants to pay waiters just $2.13 per hour because they are expected to make up the difference with the federal minimum wage, $7.25, in tips. As a result, the medium hourly pay for American waiters is now $4, or less than $700 per month based on a 40-hour workweek. Not tipping a waiter is therefore more than an insult; it is an assault on his livelihood.

The median pay for a cook is $9, but because a server makes much more than her paycheck in tips, there's a problem: waiters are paid much better than the people who actually make the food. Eliminating that irrational disparity is the reason Meyer - and some other U.S. restaurateurs - are eliminating tips.

It's a good one. Causation may be hard to prove, but it's worth noting that countries where tips are small or simply not expected are richer in culinary delights than the US.

In Switzerland, the country with the most Michelin-starred restaurants per capita, tips were officially abolished in the 1970s. That means a service charge of 10 percent to 15 percent is added to every restaurant bill, which is for tax purposes. Switzerland is a country with one of the smallest shadow economies in the world, and restaurant owners routinely pay taxes on the service element of their offerings, not just on the food they sell.

Service charges are similarly included in the check in France (15 percent is mandatory), Belgium and Hong Kong. A customer only adds more if the service has been exceptional. Many French waiters expect that as a matter of course - not because they're as badly paid as their US colleagues (they make about ,500 euros per month), which is about average for Europe) but because they're French. In Belgium and Denmark, rounding off the check is mainly enough, and in Hong Kong, waiters only accept tips because they've been spoiled by the remnants of the British colonial culture. In mainland China, as well as in Japan, tipping is largely seen as humiliating.

In restaurant cultures where tips are not part of the business model, line cooks normally make considerably more than waiters. That - along with culinary traditions, of course - accounts for the greater prevalence of top-class restaurants.

Countries where the inclusion of service charges in the check is not required - such as Germany, Spain or the UK - have relatively fewer such establishments. Again, that could be a matter of food tradition, but the chaos that comes from a lack of clear tipping rules probably contributes to the overall lower quality of these markets. In the UK last summer, a scandal broke out when it transpired that some restaurant service charges weren't going to staff, and the government waded in, demanding that the practice be changed. Working in an industry with unclear rules is unattractive to the kind of people who might make a career of waiting tables in finer establishments - the perfectionists who are likely to deliver the most perfect dining experiences. It's also a deterrent to anyone with financial planning to do.

Tipping, of course, is very American in nature. It goes with a competitive, achievement-oriented culture. But it doesn't help create great restaurants, where food, service and general ambiance combine for a memorable experience. Even the best establishments draw staff from a pool affected by the prevalent tip-based business model.

The US will never be completely tip-free like Japan. It could, however, move to the Swiss system, under which every check includes a service charge to provide information to the taxman and the customer but waiters and cooks make decent salaries commensurate with their skills. The checks will get bigger, but customers are unlikely to complain if there's less hassle and a better overall experience.

Bloomberg · Leonid Bershidsky

* Leonid Bershidsky, a Bloomberg View contributor, is a Berlin-based writer.

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