When tipping can mean more great restaurants

The U.S. has a government-imposed system that bans servers from sharing tips and allows restaurants to pay waiters $2.13 per hour. Photo / iStock

The decision of New York restaurant owner Danny Meyer to eliminate tipping in his establishments goes against the American tradition; but, if it's more universally accepted in the U.S., it might give consumers something to cheer about.

Of all the countries with Michelin-starred restaurants, waiters in the U.S. probably have the highest tip expectations. I've checked dozens of sites describing customary tipping practices throughout the world, and nowhere else is a 20 percent tip the social norm. It's why European waiters smile so broadly when they see an American tourist walk in -- and why American waiters are not so fond of European visitors.

The U.S. has a bizarre government-imposed system that bans servers from sharing tips with cooks, dishwashers and other staff who do not interact with customers and at the same time allows restaurants to pay waiters just $2.13 per hour because they are expected to make up the difference with the federal minimum wage, $7.25, in tips. As a result, the medium hourly pay for American waiters is now $4, or less than $700 per month based on a 40-hour workweek. Not tipping a waiter is therefore more than an insult; it is an assault on his livelihood.

The median pay for a cook is $9, but because a server makes much more than her paycheck in tips, there's a problem: waiters are paid much better than the people who actually make the food. Eliminating that irrational disparity is the reason Meyer -- and some other U.S. restaurateurs -- are eliminating tips.

It's a good one. Causation may be hard to prove, but it's worth noting that countries where tips are small or simply not expected are richer in culinary delights than the U.S.

In Switzerland, the country with the most Michelin-starred restaurants per capita, tips were officially abolished in the 1970s. That means a service charge of 10 percent to 15 percent is added to every restaurant bill, which is for tax purposes. Switzerland is a country with one of the smallest shadow economies in the world, and restaurant owners routinely pay taxes on the service element of their offerings, not just on the food they sell.

Service charges are similarly included in the check in France (15 percent is mandatory), Belgium and Hong Kong. A customer only adds more if the service has been exceptional. Many French waiters expect that as a matter of course -- not because they're as badly paid as their U.S. colleagues (they make about 1,500 euros per month ($1700), which is about average for Europe) but because they're French. In Belgium and Denmark, rounding off the check is mainly enough, and in Hong Kong, waiters only accept tips because they've been spoiled by the remnants of the British colonial culture. In mainland China, as well as in Japan, tipping is largely seen as humiliating.

The U.S. will never be completely tip-free like Japan. It could, however, move to the Swiss system, under which every check includes a service charge.

In restaurant cultures where tips are not part of the business model, line cooks normally make considerably more than waiters. That -- along with culinary traditions, of course -- accounts for the greater prevalence of top-class restaurants.

Countries where the inclusion of service charges in the check is not required -- such as Germany, Spain or the U.K. -- have relatively fewer such establishments. Again, that could be a matter of food tradition, but the chaos that comes from a lack of clear tipping rules probably contributes to the overall lower quality of these markets. In the U.K. last summer, a scandal broke out when it transpired that some restaurant service charges weren't going to staff, and the government waded in, demanding that the practice be changed. Working in an industry with unclear rules is unattractive to the kind of people who might make a career of waiting tables in finer establishments -- the perfectionists who are likely to deliver the most perfect dining experiences. It's also a deterrent to anyone with financial planning to do.

Tipping, of course, is very American in nature. It goes with a competitive, achievement-oriented culture. But it doesn't help create great restaurants, where food, service and general ambiance combine for a memorable experience. Even the best establishments draw staff from a pool affected by the prevalent tip-based business model.

The U.S. will never be completely tip-free like Japan. It could, however, move to the Swiss system, under which every check includes a service charge to provide information to the taxman and the customer but waiters and cooks make decent salaries commensurate with their skills. The checks will get bigger, but customers are unlikely to complain if there's less hassle and a better overall experience.

- Leonid Bershidsky, a Bloomberg View contributor, is a Berlin-based writer.

If you want to get economics pundits excited, bring up the issue of tipping. Most of my fellow pundits despise tipping, the way they despise the electoral college and the penny. Well, the pundits are sure to be rejoicing: Danny Meyer's Union Square Hospitality Group, which runs more than a dozen restaurant chains, just said it will eliminate tipping at all of its establishments.

The end of tipping would bring American restaurant culture closer to the global standard. But the celebration in the press may be premature. The issue of tipping is a lot more complicated than it seems, and it isn't clear that its death would be a good thing.

Basic economic theory gives us several reasons to like tipping. First, tips are under the table, which allows restaurants, servers and customers all to dodge a little bit of taxes. Since taxes distort the economy to some degree, theoretically this means that tipping increases efficiency. Of course, it's unfair to allow certain types of businesses, such as restaurants, hotels and taxicabs, to selectively evade taxation.

Another good thing about tipping is that it can make minimum wage laws less burdensome. Federal law allows restaurants to pay a lower minimum wage, a break known as a tip credit, if wait staff are expected to make up the difference in gratuities. When economists looked at what happened when the tip credit was decreased, they found that employment went down for servers. So the end of tipping culture will mean minimum wage laws take a bigger bite out of employment. That is something to think about as the nationwide campaign for $15 minimum wages gathers force.

A third reason to like tipping is that it can be used as a reward for good service. That would be a form of pay for performance -- customers would give bigger tips to better wait staff, which would incentivize better service and draw better servers into the industry. The trouble is, both casual experience and data suggest that tips are pretty random and unfair.

I believe that economics has made a big mistake by ignoring the utility humans get from the method of exchange.

Most of the tips we leave are determined by social convention. In the past, the standard was 15 percent. These days, it's 20 percent. That number has nothing to do with how good a server is. In addition, percentage tips are grossly unfair, since it pays lots of money to a server at an expensive restaurants and very little money to one at a cheap restaurant, even though these two servers often provide exactly the same quality of service.

Tips are also affected by random factors such as whether the customer is paying by cash or by credit or debit card. For these reasons, many economists claim that tip size is only very weakly related to the quality of service.

So tips may seem unfair, but probably give the restaurant industry -- and wait staff employment -- a boost. But here's where things get complicated. Tipping also probably has a number of effects that are not captured by this tradeoff, or by standard economic theory.

Economists typically assume that when you pay for a service, the way you pay doesn't make a difference to you. That assumption is probably wrong in the case of tipping. When customers leave a tip, they often get a sense of satisfaction from the idea that they gave money directly to a poor, hard- working person instead of to a big faceless corporation. Many of us like knowing that some of the money we pay will go directly into the server's pocket, instead of going through the vast, complex machinery of corporate accounting.

The real solution is for some businesses, such as Union Square Hospitality Group, to experiment with no-tip service, and see whether customers like it.

Econ 101 just doesn't deal with the personal bond that buyers and sellers can feel as the result of a transaction. But in the real world, that can make a big difference. Research shows that servers who draw smiley faces on checks get higher tips. Those customers aren't tipping for a smiley face -- they're tipping because it feels good to pay money to another human being with whom they feel they have shared a personal interaction.

I believe that economics has made a big mistake by ignoring the utility humans get from the method of exchange. Tipping is just one tiny example. Personal relationships between sales workers and customers, or between purchasers and suppliers, or between bosses and employees, are emotionally important to us. A huge amount of economic activity is probably driven by that emotional importance. There's no reason economics couldn't take that into account, but it's almost always ignored.

So I think tipping is a more complicated phenomenon than the pundits believe. Standard economics simply doesn't give us the answer. The real solution is for some businesses, such as Union Square Hospitality Group, to experiment with no-tip service, and see whether customers like it.

- Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for finance and business publications.