How to give out tips to service workers more effectively

I went to the movies recently, and when I bought my ticket I was asked if I wanted to leave a tip. I said no. Should I feel guilty for being a cheapskate? Requests for tips are spreading, not just from the convenience-store clerk who sells you a bottle of water but from the firm that services your mortgage.

If you frequent what we economists like to call the leisure and hospitality sector — that is to say, if you ever go out for lunch or dinner or a drink, or to watch a movie or a show or a sporting event — you may have noticed that not only are tip requests more common, but requested tipping rates are higher. Which raises the question: If you tip more, will it help workers?

Instead of the standard 15% tip, the options on the creditcard touch screen often are 18%, 20%, 25% or a custom tip. Obviously all this is a nudge in the direction of boosting the tip.

But giving service-sector workers bigger tips doesn’t necessarily mean they will end up with more money in their pocket.

Consider a scenario in which the initial effects of tipping are self-reversing — that is, wages will fall to offset the value of tips. If the official wage is $10 an hour and tips are on average $10 an hour, that adds up to $20 an hour. If tips from everybody — not just you, but everybody — go up by another $3 an hour, the new net wage is $23 an hour.

At that higher wage, more people will apply for the job.

The increased supply of labor will allow the boss to pay less than $10 an hour; it might suffice to pay only $7. Under the new regime, with tips at $13 an hour and the formal wage at $7 an hour, $3 per hour has essentially been transferred from customers to restaurant owners. The workers don’t end up with any extra money, but the owners have snookered the customers into paying a higher share of the wage bill.

In this case, you would do better by sneaking an individual worker some money on the side. That way, at least one person would get some extra cash, while you would avoid being part of a system that results in less burden on the employer.

But does this set of facts — collective increases in tips being offset by lower wages — apply to current circumstances? Probably not, at least not right away.

That answer takes some explaining. Employers are traditionally reluctant to raise wages, for fear that they will find it hard to reduce them when they have to (wages are often sticky downward). The one time they might raise wages is when there is a labor shortage, as there is right now — but even then they might be reluctant to be caught ahead of the market. Instead of raising their wages, they are letting their customers increase their tips.

Good news: For the time being, your tip is increasing net wages for workers. Bad news: It is doing so in a way that markets ought to but won’t.

Eventually, those higher net wages will attract more labor to the service sector in question, which will benefit your fellow customers, who will receive better service. So another beneficiary of your tip is the guy sitting next to you in the movie theater, who won’t have to wait so long in line for his popcorn. That is what your tip is paying for. After a while, the market will recalibrate, labor shortages will clear and once again employers will substitute your more generous tip for their own wage increase. Eventually, again, you will turn out to be the sucker. But for the time being, before markets fully adjust, you are indeed putting more money in workers’ pockets.

So, to review:

• If it is only you who is tipping more, and not all customers, the gains probably go to the worker. For that reason, if you are going to tip more, give cash to an actual human rather than in response to a touch-screen prompt.

• If you want to give a collective tip, under normal conditions you won’t much help workers. Under abnormal conditions, which currently prevail, even a collective tip is more likely to reach workers, as well as attract more labor to the workforce and help your fellow customers.

• In the longer run, however, a collective tipping system will serve to transfer some of the wage burden from employers to customers.

• So do you still wish to tip more? You should. But with a little bit of thought you can do so a lot more effectively.