American Elephants

Here’s How to Put Waiters and Waitresses Out of Work. by The Elephant's Child

In an election year, one of the big problems is that everyone wants to do nice things for their voters. They want to appeal to the heart.  But your government does not love you, much as they try to make you think they do. They love getting re-elected.  Case in point: Senator Tom Harkin (D-IA) has introduced the Rebuild America Act. (Good names make it harder to vote against). Among other things, the Iowa Democrat wants to raise the minimum wage by 220% for employees who receive tip income, such as waiters and waitresses. Huh?

Seems like only yesterday, Congress was railing about waiters and waitresses not paying taxes on their tip income. Fact: the federal minimum wage for employees who earn tip income is $2.13 an hour. The Labor Department permits this lower minimum wage so long as the employee earns at least the full federal minimum wage of $7.25 when tips are included. If tips fall short of that amount, employers kick in the rest. According to Census Bureau data, the average hourly wage for a restaurant employee earning tip income is $11.82. Top earners can collect $24 an hour or more. It pays to be a nice waiter or waitress.

The difference between the two minimum wages is called the “tip credit.” It is a political acknowledgment of the single-digit profit margins in tipped industries, and of the income supplement that gratuities provide.

Economic studies show no relationship between a boost in restaurant employee base wages and their take-home compensation.  A study that examined 20 years of Census Bureau data found that each time the mandatory state wage for tipped employees rose by 10%, hours worked fell by 5%.

Economists William Even and David Macpherson analyzed Sen. Harkin’s bill, and they estimate that the combined loss of hours would translate to the loss of 447,000 jobs. There are always consequences. Table-service restaurants have experimented with computer terminals tat allow customers to order and pay at the table. When a server is only carrying food to the table, restaurant jobs won’t be as lucrative.

Progressive politics is simple. Just make the employer pay more. The law of unintended consequences always applies.  But if Sen. Harkin’s bill doesn’t pass, restaurant employees in Iowa will know (maybe) that he tried, which is the point.

2 Comments so far
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Very well written and informative.


Comment by Subsidy Eye

Suppose we could have a seminar for Congresspeople at the beginning of each session on economics and unintended consequences? So much of economics is counter-intuitive, and a lot of law-making is genuinely well-intended with disastrous results. Wishful thinking.


Comment by The Elephant's Child

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