By
Sterling Portwood, Ph.D.
Most people are resentful or at least displease by the American custom of tipping. I was somewhere on the spectrum myself until I sat down and did an economic analysis of the custom.
Waiters are generally paid minimum wage plus tips. If tipping were abolished, as many would like, what would happen? The answer is that the waiters would not work for minimum wage. Why is that? First, it's because they are on the average quite capable people and can make significantly more than minimum wage at some alternate job, so you might think waiters would need to get paid what they can earn at an alternative job.
But that's not sufficient either. Waiters have to earn more than they could make at a regular alternative job because the waiters job is in many ways less desirable and more demanding than the typical job. Seldom do waiters have a straight eight hour shift. Usually they get dressed, go to the restaurant, work one meal, then go home, get undressed, kill time for a couple of hours, then get dressed again, go to the restaurant and work another meal; all to get their eight hours. Such split-shift work usually takes up most of the day, only part of which is compensated.
Also waiting is a difficult job in that waiters have to deal with the public. To do this job well, a waiter must be an amateur psychologist and adapt his behavior and demeanor to the personalities and moods of the diners, not to mention cranky cooks and pushy hostesses. Under such working conditions, the waiter needs to be a multi-tasker who is on and sharp all the time. This doesn't compare favorably with the typical, laid-back office job. For all of these reasons the restaurateur would need to paid waiters in the ballpark of $20 per hour to maintain a qualified workforce.
Well, with no tips, the restaurateur would have to come up with the extra money to bring waiters' pay up to about $20 per hour. So is that it, the restaurateur gets stuck with the loss? No! He's not running the restaurant just for the fun of it. He passes is additional costs through to the customer in the form of increased food and drink prices. (Economically, it's a little more complicated than that, but the complication is technical and has no significant effect on the outcome.)
So, is the customer right back where he started from? No, he's worse off. He's paying approximately the same amount for the food as he was paying before for the food plus the tips, but the customer is now getting service that is far inferior and less pleasant than he received before. Tips generally motivate service personnel to be pleasant and friendly and supply good service.
Conclusion: The tipping custom seems a needless expense, but it actually costs virtually nothing extra and on the average supplies a far more pleasant experience for the diner.
Another, Even More Interesting, Way of Looking at It: For the same $20 per hour, the tipping custom tricks the waiter into being pleasant and trying to exert himself to satisfy the diners. If there were no tipping custom the waiter would still get about $20 per hour, but wouldn't have to exert themselves on behalf of diners. It's really an interesting turnabout to understand that diners think they are being had, when in actual fact it's the waiters who are being had. It's sort of like Adam Smith's invisible hand, but with an ironic twist.
Generalization: Most people do economic analysis and, I might add, legislating and other forms of planning and analysis, like they play chess, i.e., one move at a time. They generally don't consider that subsystems, in this case economic subsystems, exist in an equilibrium state, which is the self-adjusting result of a large number of countervailing forces. If they monkey with the subsystem and change one of the variables or forces, they are always surprised when the whole subsystem readjusts into a new and different equilibrium state. It's like removing one rock from a pile of rocks. Many rocks are likely to shift and come to a new equilibrium state. The new and different subsystems state might be considered positive, negative, or mixed; but the only way to know the resulting state is 1) by "experimentation" or 2) through knowledgeable, multi-move economic analysis, a rare process indeed. I often say about the outcomes of one move legislating or planning: go left and you'll get right, go North and you'll get South.
Another Example, of Which There Are Hundreds: The State legislators wished to help out poor renters, so, in their wisdom, they put into the Law that renters cannot be charged a deposit of more than one month's rent. On the surface, it looks like a great idea and beneficial to the poor. In actual fact, it's a bad idea and devastating to many renters, of all social levels. Why? Well, if we look beyond the first move, we see that the landlord is not going to take a risk of renting to anyone with bad credit, even if they have plenty of money. The well intended Law has killed the landlord's ability to offset the risk posed by applicants with bad credit, by offering the option of additional deposit money. Many such people find it very difficult to rent at all and/or have to pay higher rents to be allowed in...and I would rather pay higher deposits than higher rents anytime.
The Usual Counterargument: But what about the greedy landlord, he can then charge two months, three months, four months deposit to everyone? He could, if the free market system, that this country is largely based on, didn't work. What's to stop the landlord from doubling or tripling his rent? Answer: Nothing..., except the free market competition from other greedy landlords, i.e., Adam Smith's invisible hand. There is no law against increasing rents, why should there be a law against increasing deposits? Setting prices optimally in these kinds of situations, on a day by day basis, is what capitalism does best, far better than legislators who were voting maybe 40 years ago and had no idea of the complex mechanisms within the residential rental market even in their day, much less today.
Acquiescence to the Unconvinced: If the above doesn't convince you that free market capitalism generally keeps prices in check, I'll just have to admit that you're smarter than I am. And, to take advantage of your greater intellect, I suggest that you start a restaurant or any other business and charge double what the competition is charging. I'm sure that you'll be so rich after a year or two that you'll be able to retire to a luxury condo on
Newsflash: Capitalism works in the vast majority of situations and, when it doesn't, that failure is generally consistent with economic theory and predictable by those few who can do quality economic analysis.
