The economics of tips

Tipping is large and growing, but we know little about its consequences for workers and firms. We link point-of-sale and payroll records at 20,000 U.S. firms, which lets us observe tips from customer payment to worker earnings. We find that tips are a nearly constant share of revenue, which means hourly pay moves with revenue. Firms that begin collecting tips claw back between 23 and 33 cents of each dollar of tips through lower base wages. Tips reward effort: workers at tipping firms earn more by serving more customers. We show this with demand shocks constructed from customer spending at other businesses. A demand shock raises revenue nearly twice as much at tipping firms as at non-tipping firms, while base wages and prices do not respond. Output per hour rises more despite a larger increase in hours. Effort drives the gap because each worker is more productive, so the firm expands and recovers about a third of the tips. Yet not every firm adopts tipping: the gain is smaller where customers tip less. A model calibrated to the demand-shock estimates implies that tipping benefits workers and firms, raising job value by about half and firm profit by about 30 percent in firms where customers are prone to tip. These gains may explain why tipping has recently grown in many industries.

That is by Dylan Balla-Elliott and Isaac Norwich, Isaac being on the job market this year from University of Chicago.

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