Tipping Point

I am rather amused to hear opinions that argue that tipping to waiters is an act of generosity, and a barometer for how we treat those less fortunate than we are.

From a first order economic perspective, tipping shouldn’t matter. What you are willing to pay at the restaurant table depends on the economics of dining, and what the restaurateur pays his staff depends on the vagaries of the labour market.

 An economist would point out that a tip comes out of your pocket as much as the rest of the  bill does, and if you are in a society where a 15% or 20% tip is customary, you will factor that into your dining decisions. In other words, when deciding whether to eat out or not, or when deciding whether to eat at a particular place or not, you should mentally translate an expected bill of Rs1,000 to Rs1,200 ( assuming a 20% tip) and decide on that basis.

 Likewise, when a waiter’s salary is negotiated, the tips that he can expect must surely be taken into account. How can it not be? A restaurateur  will certainly tell a candidate for the post of waiter: “Look, your official salary is X, but you can expect tips of Y per month, so your take home is actually X+Y.”

 So, at first glance, it must seem that the custom of tipping should make no difference. If there were to exist two cities that were identical in all respects except  that Stingy City has a culture that tips 5% and Generous City has a culture that tips 20%, the menu prices and waiter salaries in the two cities must adjust themselves so that diners pay out approximately the same amount to the restaurant and the waiters take home around the same amount in both cities.

 As I have taken care to mention, all this is the first order perspective. What about when we look more closely? This is where things get a little more interesting.

 Suppose that you have a culture where tipping up to 20%  is customary, but any tip in the range of 0 to 20 is acceptable, depending on how much you think you can afford, and how much you liked the service. What will happen then?

 First, from the perspective of economics, this increases flexibility, which is a good thing. One of the biggest problems that economies face is that wages and prices are rigid. Actually, it is worse than that – wages are rigid downwards (i.e. it is difficult to reduce wages) while prices aren’t very rigid, but to the extent that they are, they are rigid upwards – i.e. it is difficult to raise prices. This makes it difficult for economies to get out of a downturn, because you can’t reduce people’s salaries when faced with reducing profits. So you hold on to employees, and when you can’t do that, you lay them off (or if labour laws make it difficult to do even that, you struggle for a bit and close down the company)

 If you have a way to reduce people’s salaries (or, more precisely, link it to how your business is doing) then it is great for your business and for the larger economy (and for your workers). This is exactly what tipping achieves, especially if you have the culture that I just described, but actually even if you don’t, because what you earn as tips also depend on how many people show up at your restaurant, which also depends on how the economy is doing.

 Also, tipping is a great way to do what business owners dream of doing – charging different people different prices based on their willingness and ability to pay.  How do you charge 1,200 per dinner from the patron who is willing to pay that much without turning away the patron who is willing to pay only 1,000? Or if you set 1,000 as the price, how do you ensure that you extract the additional 200 rupees from the chap who is willing to pay higher as well? Tipping is a great way to do that, provided it is truly flexible.

 Another second order effect that we must consider is the result of “anchoring” or “sticker shock”.  The first order economist will assume that for the rational diner, there is no difference between seeing Rs1,200 and  Rs1,000 on the menu card, if he does not have to tip 20% on the former but has to on the latter. We know that this is not true. The human mind may get anchored to the number 1,000 and reduce their estimate of the expense involved (and may be less unhappy about paying the additional Rs200 because no matter how strong the social norm is and how little choice he has in the matter, he perceives the tip as voluntary and an act of generosity that he feels good about.)  In other words, a society where a generous tip is the norm may, ceteris paribus, end up paying more at the restaurant’s table.  (But this, as we have seen, does not necessarily translate  to better pay for the waiters) Actually, if you think of it, other than the voluntary and generosity part, the service charge that Indian restaurants have taken to charging must do as good a job of reducing sticker shock.

 In a nutshell, tipping increases the variability and uncertainty in the waiter’s take home pay. It also puts power in the hands of the diner to reward or punish waiters day in and day out for “performance”. Given that the labour movement has always fought against uncertainty in pay and against being judged for performance, I find it funny that tipping is portrayed as an action that improves the situation of waiters. On the other hand, as I have explained, variable pay and variable pricing does  make life better for restaurant owners and waiters, though not in the way you probably think.

 But all this assumes that tipping is truly voluntary and variable. But the way the custom has evolved in the United States, it is a major social faux pas not to tip in the 15-20% range. Attitudes have evolved to a point of such rigidity that you are told that if you can’t tip that much, you shouldn’t be eating at that restaurant at all. Under the circumstances, it is not even a measure of how well you treat those lower down the social order. Given the social pressure in favour of tipping, how do you know if the tipper who tips 20% is a believer in egalitarianism or just someone clued into social norms? In such circumstances, the custom of tipping does no good to society other than serve as an instrument of snobbery and act as a trap for those unaware of social mores.

4 thoughts on “Tipping Point

  1. Good points all. My observation in India has been that most people tip absolute amounts rather than a percentage of the billed amount. For eg. whether the billed amount is 1000 or 5,000 or 15,000 one generally would not tip a waiter more than 100-500 bucks. May be some do but generally this is the case. Therefore in India, the economics that you mentioned might not apply to restaurant owners. Mostly its just generosity and that too its very random like all things Indian.

  2. i have issues with the sticky wage being a ‘problem’. it is not a problem -unless you believe in mathematical models devised by keynesians and other econometricians as a good description of reality,
    people PREFER to have sticky wages and therefore are actually trading off some job security.
    the stickiness is a desired feature because people dont want wages which fluctuate wildly from month to month.
    why not create a model that explains this reality than assume it to be a problem

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