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Do Tips Increase Workers' Income?

Author

Listed:
  • Oz Shy

    (Research Department, Federal Reserve Bank Boston, Boston, Massachusetts 02210)

Abstract

This paper constructs a model of service providers who compete in service and labor markets simultaneously to analyze the effects of tipping on hourly wages and total tip-inclusive hourly worker compensation. An increase in the tipping rate reduces hourly wages. Total worker compensation increases at different rates depending on the market structure, market coverage, and employment level, with the exception of price-taking (competitive) service providers, where the tip-inclusive hourly income declines with the tipping rate. The paper develops an index of “effective tipping” that measures the net percentage change in total hourly worker compensation associated with each tipping rate. This paper was accepted by John List, behavioral economics .

Suggested Citation

  • Oz Shy, 2015. "Do Tips Increase Workers' Income?," Management Science, INFORMS, vol. 61(9), pages 2041-2051, September.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:9:p:2041-2051
    DOI: 10.1287/mnsc.2014.1976
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    References listed on IDEAS

    as
    1. Azar, Ofer H., 2012. "The effect of the minimum wage for tipped workers on firm strategy, employees and social welfare," Labour Economics, Elsevier, vol. 19(5), pages 748-755.
    2. Azar, Ofer H., 2011. "Business strategy and the social norm of tipping," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 515-525, June.
    3. Lynn, Michael & Jabbour, Patrick & Kim, Woo Gon, 2012. "Who uses tips as a reward for service and when? An examination of potential moderators of the service–tipping relationship," Journal of Economic Psychology, Elsevier, vol. 33(1), pages 90-103.
    4. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    5. repec:wly:soecon:v:80:3:y:2014:p:633-655 is not listed on IDEAS
    6. Azar, Ofer H., 2004. "What sustains social norms and how they evolve?: The case of tipping," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 49-64, May.
    7. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 334-349, April.
    8. John Anderson & Orn Bodvarsson, 2005. "Do higher tipped minimum wages boost server pay?," Applied Economics Letters, Taylor & Francis Journals, vol. 12(7), pages 391-393.
    9. Lynn, Michael & McCall, Michael, 2000. "Gratitude and gratuity: a meta-analysis of research on the service-tipping relationship," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 29(2), pages 203-214.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Damon Alexander & Christopher Boone & Michael Lynnb, 2021. "The Effects of Tip Recommendations on Customer Tipping, Satisfaction, Repatronage, and Spending," Management Science, INFORMS, vol. 67(1), pages 146-165, January.

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