Thursday 25 May 2017


New Zealand has an excellent non-tipping equilibrium, but there's been some discussion of encouraging a shift to tipping. A lot of restaurants do kinda have it, mostly (I think) as a way of securing rents from foreign tourists who don't know better.

But most of the discussion around tipping has the base economics of the thing wrong. The main point of tipping is to solve an information asymmetry problem.

Suppose you own a restaurant and simply have no way of telling which of your wait staff are decent with the customers and which are terrible. In that state of the world, you pay them a low hourly wage and encourage the customers to top it up based on the quality of service. Ideally this means that bad wait staff get no tips and exit the industry, average service gets an average overall wage inclusive of tips, and excellent staff are appropriately compensated.

In practice, shame constrains customers against leaving meagre tips for poor service, and tipping makes splitting bills among groups a hassle. And is it really that hard for a restaurant owner to tell whether the wait staff are doing their jobs properly?

Also worth noting is that service staff in roles with tipping have lower minimum wages in the US. Wages plus tips in total have to equal the minimum wage in some states; others just have a really low minimum wage for tipped staff. New Zealand's minimum wage is already very high relative to prevailing wages, and restaurant meals here are not cheap. Combining a high minimum wage with a shift to a tipping norm would have effects on overall demand for restaurant meals.

Finally, and from a more Eric-preferences perspective, it's just really really nice to have the staffing costs bundled into the price of everything and not have to carry a wad of small bills around to pay the same amount for your meal at the end of the night. And I don't particularly like what tipping does to service in the US - because I'm idiosyncratic. On average, people give higher tips where the server is chatty and, if the server is female, touches the customers. I don't like any of that.

Previously: Tipping and inflation incidence

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