The Effect of Tip Credits on Earnings and Employment in the U.S. Restaurant Industry

33 Pages Posted: 5 Jan 2013  

William E. Even

Miami University; IZA Institute of Labor Economics

David A. MacPherson

Trinity University; IZA Institute of Labor Economics

Abstract

According to federal law in 2012, employers can take a credit of up to $5.13 for tips received by workers in satisfying the minimum wage requirement of $7.25. This study uses interstate variation in laws regarding tip credits and minimum wages to identify the effects of reducing or eliminating the tip credit on employment and earnings in the U.S. restaurant industry. Using data from the Quarterly Census of Employment and Wages and the Current Population Survey, we find that a reduction in the tip credit increases weekly earnings but reduces employment in the full services restaurant industry and for tipped workers. The results are robust to controls for spatial heterogeneity in employment trends and are supported by a series of falsification tests.

Keywords: tip credit, minimum wage, tipped workers, cash wage, earnings, employment

JEL Classification: J30, J31, J38

Suggested Citation

Even, William E. and MacPherson, David A., The Effect of Tip Credits on Earnings and Employment in the U.S. Restaurant Industry. IZA Discussion Paper No. 7092. Available at SSRN: https://ssrn.com/abstract=2196757

William E. Even (Contact Author)

Miami University ( email )

208 Laws Hall
Oxford, OH 45056
United States
513-529-2865 (Phone)
513-529-6992 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

David A. MacPherson

Trinity University ( email )

San Antonio, TX 78212
United States
210-999-8112 (Phone)
210-999-7255 (Fax)

HOME PAGE: http://www.davemacpherson.com

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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