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

Author

Listed:
  • Even, William E.

    (Miami University)

  • Macpherson, David A.

    (Trinity University)

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.

Suggested Citation

  • Even, William E. & Macpherson, David A., 2012. "The Effect of Tip Credits on Earnings and Employment in the U.S. Restaurant Industry," IZA Discussion Papers 7092, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp7092
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    References listed on IDEAS

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    1. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, vol. 84(4), pages 772-793, September.
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    3. David Neumark & William L. Wascher, 2008. "Minimum Wages," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262141027, December.
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    5. Daniel Aaronson & Eric French, 2007. "Product Market Evidence on the Employment Effects of the Minimum Wage," Journal of Labor Economics, University of Chicago Press, vol. 25(1), pages 167-200.
    6. Arindrajit Dube & T. William Lester & Michael Reich, 2010. "Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 945-964, November.
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    Cited by:

    1. Allegretto, Sylvia A., 2013. "Waiting for Change: Is it Time to Increase the $2.13 Subminimum Wage?," Institute for Research on Labor and Employment, Working Paper Series qt3zx9v0zk, Institute of Industrial Relations, UC Berkeley.

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    More about this item

    Keywords

    employment; tip credit; minimum wage; tipped workers; cash wage; earnings;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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