Tips versus Higher Wages: Data, Theory, and Simulations

28 Pages Posted: 1 Mar 2018 Last revised: 8 Feb 2019

See all articles by Oz Shy

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: February 6, 2019

Abstract

he law permits employers to pay tipped employees below the full minimum wage. I investigate a policy whereby income collected from tips is replaced by a higher minimum wage for tipped employees. In a fully-served market, this transition makes both employers and servers better off while consumers end up paying higher prices for the service. Under local monopolies, this transition may result in some loss of employment. Replacing tips with higher wages raises employers' artificially-low hourly labor cost to their actual levels thereby inducing employers to increase consumer prices. Simulations based on actual data are then used to test some of the model's predictions.

Keywords: Minimum wage for tipped employees, minimum wage, tipping, service charge, tip income, tipping as a social norm.

JEL Classification: J3, M52

Suggested Citation

Shy, Oz, Tips versus Higher Wages: Data, Theory, and Simulations (February 6, 2019). Available at SSRN: https://ssrn.com/abstract=3127117 or http://dx.doi.org/10.2139/ssrn.3127117

Oz Shy (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/shy-oz.aspx

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