October 25, 2015

Why Do Restaurant Tip Rates Inflate? Slower Increases in Food Prices & Minimum Wage

A while ago I asked Why Do We Tip So Much?   I'd been puzzled why we used to tip only 10-15% but now the norm is 20%.

Just now a thought occurred to me... maybe the reason the standard expected % rate for tips has gone up is that food costs didn't go up as fast as wages?   Its a possibility.   I mean if a burger cost $1 in 1980 and is now $2 then a 15% tip in 1980 would be 30¢ and 60¢ today.  Just about doubling.   But what if wages tripled in that period?    Tips wouldn't have kept pace with inflation so it would make more sense to have a higher % tip.

In 1984 the 15% tip was typical (noted previously).   Today we expect 20% tips.

What has the cost of restaurant food done in that same period?

For that lets look too data chart from the Fed. :
Consumer food prices (away fro home ) were up ~155% from 1980 to today.

Now compare that to income.  From the census 

In 1984 median income was $10,417 and by 2014 it went up to $28,757.

From the early 80's to today, restaurant food prices went up ~150% and wages went up ~180%.

In 1984 the minimum was $3.35 with a 50% tip credit.   So workers would have gotten $1.67 per hour in tips.  (minimum wage history)    Minimum wage for tipped employers (with the tip credit) has been stuck at $2.13 per hour since 1991 where it is today.

 Median hours worked for waiters and waitresses is around 35 hours a week.  

Nationally today waiters and waitresses average $10.40 an hour.   (BLS data)    With a $2.13 minimum they're getting $8.27 in tips on average.

From an old Occupational Outlook Handbook said that "In 1984, median annual earnings (excluding tips) of full-time waiters and waitresses were $9,400."

I'm finding it hard to believe that annual wages for waiters were that high excluding the tips.    I'm thinking that might be an error and that they probably mean to say including tips instead.

If I start with annual wage of $9,400 in 1984 and then work forwards then it goes as follows:

$9,400 in total wages in 1984 would have been a combination of minimum wage and tips.   Assuming a weekly work week of 35 hours that works out to $5.16 per hour.   Minimum wage in 1984 would be $1.67 so they would have made $3.49 per hour in tips.   Thats then $6351 in tips and $3039 in wages.   Assuming a 15% tip rate then the food served would have to be about $42,340 a year to get to that $6351 tip total.

$42,340 in food in 1984 would then grow to $107,967 per year in 2015.
For the $9,400 in 1984 to grow the same as wages in general that would have to hit $26,320 today.
Minimum wage on 35 hours a week would give just $3913  so they'd have to make $22,407 in tips.
$22,407 in tips a year on $107,967 of food equates to just about ... drum roll.... 20% tip rate today.

So theres my answer :

Due to slower increases in minimum wage pay for tipped employees and slower increases in food costs tips would have to go from 15% to 20% in the past 30 years in order for tipped workers to retain the same relative incomes.


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