Minimum Cash Wages, Tipped Restaurant Workers, and Poverty

• Published date: 01 October 2018
• Author: Joseph J. Sabia,Taylor Mackay,Richard V. Burkhauser
• DOI: http://doi.org/10.1111/irel.12215
• Date: 01 October 2018

Minimum Cash Wages, Tipped Restaurant

Workers, and Poverty

*

JOSEPH J. SABIA , RICHARD V. BURKHAUSER and

TAYLOR MACKAY

This is the first study to examine the effect of increases in the tipped minimum cash

wage—the wage employers must pay to tipped employees—on poverty. Using

March Current Population Survey data (1988–2014), we find that tipped minimum

cash wage increases are associated with declines in the risk of a tipped restaurant

worker living in a poor family (elasticities around –0.2). However, we find little evi-

dence of poverty-alleviating effects when using the household rather than the family

as the sharing unit. This result is consistent with evidence that a substantial share of

tipped workers who live in a poor family live in a nonpoor household with persons

unrelated by blood, marriage, or adoption who contribute to the household’s income.

Furthermore, we find that tipped minimum cash wage hikes are associated with in-

creases in the risk of a younger, less-educated individual living in a poor family or

household. Adverse labor demand effects that redistribute income among low-

skilled individuals drive these results. We conclude that raising the tipped minimum

cash wage is a poorly targeted policy to deliver income to poor restaurant workers.

Workers who are forced to rely mainly on tips see their paychecks

fluctuate widely, frequently leaving them unable to pay their bills or

provide for their families. This problem is now worse than ever

because economically squeezed customers are leaving smaller tips. As

a result, waitresses and waiters—the largest group of tipped workers

—have three times the poverty rate of the workforce as a whole.

—National Employment Law Project (2009)

*The authors’affiliations are, respectively, San Diego State University, University of New Hampshire,

ESSPRI, and IZA, San Diego, California. E-mail: jsabia@sdsu.edu; University of Texas-Austin and Univer-

sity of Melbourne. E-mail: rvb1@cornell.edu; and University of California Irvine, Irvine, California. E-mail:

mackaytc@gmail.com. This study was funded, in part, by the Employment Policies Institute. The authors

thank William Even and David Macpherson for providing data on cash minimum wages. The authors also

thank Thanh Tam Nguyen, JD Sullivan, and Edgar Torres for excellent research assistance. This study was

funded, in part, by the Employment Policies Institute and was supported by the Center for Health Economics

and Policy Studies (CHEPS) at San Diego State University.

INDUSTRIAL RELATIONS, DOI: 10.1111/irel.12215, Vol. 57, No. 4 (October 2018).

©2018 Regent s of the Univers ity of Calif ornia Published by Wiley Periodicals, Inc., 350 Main Street,

Malden, MA 02148, USA, and 9600 Garsington Road, Oxford, OX4 2DQ, UK.

637

Introduction

Employers of tipped workers such as waiters, bartenders, or bussers must

pay their employees a minimum hourly cash wage, which, when added to an

employees’average hourly tipped income (“tip credit”), sums to at least the

nontipped minimum wage. As of June 2017, the federal minimum cash wage

for tipped employees was $2.13 per hour and the minimum wage paid to non-

tipped employees was $7.25 per hour.

The Raise the Wage Act of 2017, sponsored by Senator Patty Murray (D-

Washington), Senator Bernie Sanders (I-Vermont), Representative Bobby Scott

(D-Virginia), and Representative Keith Ellison (D-Minnesota), would (1) raise

the federal minimum wage paid to nontipped workers to $15 per hour by

2024, and (2) raise the minimum cash wage paid to tipped workers to $4.15

per hour in 2018 and $1.15 per hour per year thereafter until it reaches parity

with the nontipped wage at $15 per hour. Advocates of these increases argue

that they are necessary to raise the labor earnings of tipped workers and to

alleviate poverty:

No one in our country who works full-time should live in poverty. ...

Since 1991, the subminimum wage for tipped workers has been fixed

at $2.13 per hour. While tips are expected to supplement the submini-

mum wage, these tend to be unstable and seasonal, often making

employees susceptible to wage theft, and further widening the gender-

wage gap as more women tend to be tipped workers. Tipped workers

are two times more likely to live below the federal poverty line. (Raise

the Wage Act 2017)

A relatively large literature has found that increases in the minimum wage

paid to nontipped workers have been ineffective in reducing poverty due to

poor targeting (Burkhauser, Couch, and Glenn 1996; Card and Krueger 1995;

Sabia and Burkhauser 2010; Sabia, Burkhauser, and Nguyen 2015; Sabia and

Nielsen 2015) and adverse employment effects (Neumark and Wascher 2002;

Neumark, Salas, and Wascher 2014a, 2014b; Sabia, Burkauser, and Nguyen

2012, 2016). However, very little is known about the poverty effects of mini-

mum cash wage increases.

The poverty impacts of the tipped minimum cash wage may differ from the

nontipped minimum wage for a number of reasons. Tipped workers represent

a narrower slice of the U.S. workforce than nontipped minimum wage workers

(2.7 percent versus 5.2 percent; see Allegretto and Cooper 2014; U.S. Bureau

of Labor Statistics 2017). Thus, tipped minimum cash wage increases may

have a smaller impact on the economic well-being of low-skilled workers

overall. On the other hand, because the tipped minimum cash wage affects

638 / JOSEPH J. SABIA,RICHARD V. BURKHAUSER AND TAYLOR MACKAY

workers in a somewhat narrower set of jobs, mostly in the restaurant industry

(Even and Macpherson 2014), it is possible that the tipped minimum cash

wage could better target families or households near the poverty line than the

nontipped minimum wage.

As we show below, nearly 20 percent of tipped restaurant workers live in

poor families, while an additional 20 percent live in families with incomes

between 100 and 200 percent of the federal poverty threshold (FPT). More-

over, in sharp contrast to nontipped minimum wage workers, approximately

one half of all tipped workers are the highest earner in their family-sharing

units.

1

Furthermore, current proposals to increase the minimum cash wage

from $2.13 per hour to $7.60 by 2021 (and to nearly $15 per hour in 2027)

could, if not accompanied by a reduction in hourly income from tips or in

hours worked, raise the average weekly labor earnings of full-time employed

tipped workers by more than $200 per week. Such additional labor earnings

could generate potentially important poverty-alleviating effects for affected

workers’families.

While minimum cash wage-induced adverse employment or hours effects

could undermine total cash wage gains by workers living in poor families, as

is the case with nontipped minimum wage increases, minimum cash wage

increases may also affect consumer tipping and employer tip pooling. These

additional general equilibrium effects may negatively impact total labor earn-

ings that workers receive, thus undermining family income gains and muting

poverty-alleviating effects.

Finally, the magnitude and distribution of tipped minimum cash wage

increases on total labor earnings could differ from those of nontipped wages

(Allegretto and Nadler 2015; Even and Macpherson 2014). Adverse labor

demand effects could differ among workers living in families just above or

below poverty thresholds. Such effects could change the distribution of their

earnings such that family poverty could decline among tipped workers who

retain their jobs (and do not have their hours substantially cut), but increase

for the families of other low-skilled workers who lose their jobs. Whether

changes in the income distribution that result from this change in earnings is

desirable depends on the relative weights society places on these “winners”

and “losers”in its social welfare function, and whether there are alternative

policy instruments that could more efficiently deliver work-related income to

tipped workers whose families live in poverty.

1

As we will discuss in detail below we use standard Census Bureau definitions of family and household

here that are consistent with the definition of sharing units in the poverty literature. While the Census survey

unit is the household, there is considerable controversy in the poverty literature over which is the more

appropriate assumption of how individuals within a household share their collective income.

Tipped Minimum Wages and Poverty / 639