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Here is a tip–tips aren’t always tips

Sylvia Allegretto, Economist, Co-Chair of the Center on Wage and Employment Dynamics | August 13, 2013

Workers from Wal-Mart to Macy’s to McDonald’s have taken to the streets across the country to demand better wages and working conditions. The actions have brought to light the plight of low-wage workers and how difficult it is to makes ends meet on such low pay. Importantly, their ranks are on the rise given that most of the jobs created post-Great Recession have been in low wage service occupations. Many of these jobs are in retail and the restaurant industry which pay wages at or close to the minimum wage—which is $7.25 nationally. However, many are paid just $2.13—two-thirteen you say? Yes, that is what wait staff and other tipped workers are often paid.

As a former waiter and bartender of seven years, I’m always a bit miffed that the sub-minimum wage paid to tipped workers has been all but forgotten. The $2.13 wage has been the law of the land since 1991! As with the regular minimum wage, some states have higher sub-wage floors and seven states do not allow for a sub-minimum; but a third of all workers reside in states that allow for the two-thirteen wage.

The two-tiered wage system hinges on the ‘tip credit’ provision afforded to employers. The tip credit is the amount of customer tips an employer can use as credit towards a worker’s wage. Today the federal tip credit, which is the difference between the regular minimum wage of $7.25 and the $2.13 tip wage is $5.12 — this is the part of the tip that is not a tip but a customer-provided wage subsidy to the employer. If a worker’s tips combined with the cash wage paid by the employer do not equal the regular minimum wage, the employer must make up the difference (good luck with that!).

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When originally instituted in 1966, the tip credit and the tipped wage both contributed half of the regular minimum wage as depicted in the Figure. Today, the tipped wage of $2.13 is now just 29% of the regular minimum wage, while the tip credit afforded to employers makes up 71%. Thus the customer provided subsidy is now the lion’s share of a worker’s legal minimum wage. Restaurant customers typically believe the tip that they leave is a reward to the worker for good service; in reality, customers are paying a significant portion of the wage bill—a nice subsidy to an employer’s bottom line.

Tipped workers often do not receive any other benefits such as paid sick days, paid vacation, health insurance or retirement benefits–and their base pay is often all but gone after taxes. So these workers live off of tips that are uncertain and work shifts that are often unpredictable. Wait staff are overwhelming women (72%) and a third are at least 30 years old. Wait staff from a Denny’s in Detroit or a diner in Texas to a truck stop in Wyoming deserve better.

For more information of the sub-minimum wage, its history and the consequences of such a low base wage see this article I wrote on the subject for the August edition of Symposium Magazine. This is a new online magazine that merges academia with public life.