Tipped Wage Effects on Earnings and Employment in Full‐Service Restaurants

• Author: Carl Nadler,Sylvia Allegretto
• Date: 01 October 2015
• Published date: 01 October 2015
• DOI: http://doi.org/10.1111/irel.12108

Tipped Wage Effects on Earnings and

Employment in Full-Service Restaurants

*

SYLVIA ALLEGRETTO and CARL NADLER

We exploit more than 20 years of changes in state-level tipped wage policy and

estimate earnings and employment effects of the tipped wage using county-level

panel data on full-service restaurants (FSR). We extend earlier work by Dube,

Lester, and Reich (2010) and compare outcomes between contiguous counties that

straddle a state border. We find a 10-percent increase in the tipped wage increases

earnings in FSRs about 0.4 percent. Employment elasticities are sensitive to the

inclusion of controls for unobserved spatial heterogeneity. In our preferred mod-

els, we find small, insignificant effects of the tipped wage on FSR employment.

Introduction

The minimum wage is one of the most researched areas in labor economics,

with a vast body of literature that dates back nearly 70 years (Brown 1999).

Over the last several decades, research on the minimum wage has further pro-

liferated as economists have exploited the growing variation in state minimum

wage policies. However, research, public debate, and policy have largely

ignored the lesser known tipped wage received by tipped workers (sometimes

referred to as the subminimum or cash wage), even as it too has ample state

variation that facilitates empirical estimation. Indeed, the existence of two fed-

eral wage floors,

1

with the federal tipped wage at $2.13 since 1991, is rela-

tively unknown.

The 1966 Fair Labor Standards Act (FLSA) amendments expanded wage

protections to restaurant, hotel, and other service workers but also allowed for

a“tip credit”whereby employers could use tips, provided by customers, as

*The authors’affiliations are University of California, Berkeley, Berkeley, California. Email: allegretto@

berkeley.edu; cnadler@econ.berkeley.edu.

The authors are grateful for generous support from the Ford Foundation and the Russell Sage Foundation.

They thank Megan Collins, Luke Reidenbach, and Rachel West for excellent research assistance and David

Card, Arindrajit Dube, Bill Lester, Michael Reich, Jesse Rothstein, Ben Zipperer, and two anonymous review-

ers for their valuable comments and suggestions.

1

There is also a youth wage that allows employers to pay employees under 20 years of age a lower

wage ($4.25) for a limited period (90 calendar days, not work days) after they are first employed.

INDUSTRIAL RELATIONS, Vol. 54, No. 4 (October 2015). ©2015 Regents of the University of California

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“credit”toward a worker’s regular minimum wage. Today, at the federal level,

the regular minimum wage is $7.25 and the allowable tipped wage is $2.13—

the $5.12 difference is the maximum allowable tip credit. The $5.12 tip credit

may be thought of as a customer-subsidized portion of the employer wage bill.

The paucity of research inquiry into the tipped wage and its tip credit coun-

terpart means the policy and its effects are not well understood. Moreover,

employment in the restaurant industry—a heavy user of the low-wage work-

force—has been growing. Figure 1 shows that private-sector employment grew

by approximately 22 percent from 1990 through 2012, while employment in

the full-service (FSR) and limited-service (LSR) restaurant sectors grew by 78

percent and 62 percent, respectively. At the same time, private-sector earnings

grew by 20 percent while earnings increased by 14 percent and 2 percent,

respectively, for workers in the FSR and LSR sectors.

Employment of tipped workers is common in the FSR sector but not in the

LSR sector. We use a panel (1990Q1–2013Q1) of data from the Quarterly

Census of Employment and Wages (QCEW) that allows us to separate FSR

from LSR. This separation will allow for a more nuanced analysis of the two

wage floors. We expect to find earnings effects on the tipped wage for the

FSR sector but not for the LSR sector—an important falsification test. We will

80%

100%

120%

140%

160%

180%

200%

Private sector earnings

FSR earnings

LSR earnings

Private sector employment

FSR employment

LSR employment

FIGURE 1

EMPLOYMENT AND EARNINGS GROWTH:PRIVATE SECTOR,FULL-SERVICE (FSR) AND LIMITED-SERVICE

(LSR) RESTAURANTS, 1990–2012

SOURCE: Authors’analysis of Quarterly Census of Employment and Wages data.

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