Does a Lower Minimum Wage for Tip-Earning Workers Affect Total Pay?

Key Findings

• Tips are a vital source of income for workers in the food services industry.  In most states, tipped workers -- like those in food services -- are subject to a different, lower minimum wage than non-tipped workers. For these workers, tips make up on average anywhere from 70-80 percent of their total pay.
• Nearly 90 percent of food service workers have a base pay that’s lower than the standard minimum wage. In states where the federal minimum wage for workers who earn tips is $2.13, at least half of these workers earn exactly that amount.
• Food service workers have a much higher total pay in states where tipped workers are subject to the same minimum wage requirements as non-tipped workers, our analysis found.
• When accounting for changes in the cost of living, wages for tipped workers have risen over the past couple of years, while the amount people tip has fallen. This means pay hasn’t really changed for workers who rely on tips. However, in states that require all workers be paid the state’s standard minimum wage, these food service workers have seen a boost in total pay, offsetting the decline in earned tips.  

Raising the minimum wage has been a pressing issue of late. But what most people don’t realize is that there are really two kinds of minimum wages. One is the standard type: By federal law, every worker must be paid at least $7.25 per hour by their employer. The other is what’s known as a “tipped” minimum wage, where workers who earn tips, such as waiters and bartenders, can be paid a much less hourly wage. According to federal law, a worker who earns tips can be paid as low as $2.13 per hour, much less than the standard $7.25 hourly wage. We call this a “two-tiered” minimum wage. In recent years, two-tiered minimum wages have been controversial, with some cities -- such as Washington DC in June 2018 -- voting to repeal this lower minimum wage and institute one standard minimum wage that would apply to all workers. Critics argue that a two-tiered minimum wage system hurts workers who earn tips,  allowing employers to pay them less and makes workers’ paychecks less stable as their income is more dependent on tips rather than base pay. On the other hand, supporters of a two-tiered system argue that it allows employers to hire more workers and keep prices low for consumers. Does a two-tiered minimum wage hurt workers who earn tips? Do employers in states with two-tiered systems really lower base pay for workers who earn tips? In this analysis, we use a large sample of salaries from Glassdoor to see how a two-tiered system impacts wages, tips and total pay for food service workers.

What We Did

Using a large sample of Glassdoor salary data, we explore tips and wage trends over the past couple of years based on different state policies. We narrow our analysis to waiters, servers and bartenders in the food service industry, as tips are a vital piece of total pay for these workers. Moreover, a significant share of the food service workers we examined (about 60 percent) report earning tips as income. Glassdoor salary data offer a unique perspective on this issue because wages and tips are recorded separately. Most analyses on the tipped worker industry use aggregated tips and wage data, and can only speak to what happens with these workers’ total pay. Glassdoor salary data allows us to examine wages and tips separately to see whether a two-tiered policy stymies wages and when wages do rise, do tips respond? We only examined salaries of part- or full-time workers who reported receiving tips. For these salaries, we calculated their hourly wage and tip rates. We do not observe how many hours each person works, and so we assumed that part-time corresponds to 20 hours per week and full-time to 40 hours per week. Next, we categorized states based on their minimum wage laws, which we obtained from the Economic Policy Institute’s Minimum Wage Tracker. Based on these laws, we grouped states into three categories: 1) states that have a federal two-tiered system with a $2.13 minimum wage for tipped workers, 2) states with their own two-tiered system that has a different minimum wage, and 3) states with one standard minimum wage for all workers (and no two-tiered system). We then took the average tip and wage rate for each city over five years (adjusted to account for the cost of living) and assigned each city to one of the three state groupings above.(1)

The Federal Two-Tiered System Keeps Wages Low For Most Food Service Workers

There are currently 15 states that have a federal two-tiered minimum wage system of $7.25 (non-tipped) per hour and $2.13 (tipped) per hour(2). Food service workers in these states often receive the $2.13 per hour minimum. From 2013 to 2016, about 50 percent of food service salaries in these states reported a wage of exactly $2.13, according to Glassdoor data, or one in every two food service workers. In 2017, the share of workers reporting a wage of exactly $2.13 in these states dropped sharply. This may reflect workers receiving wage increases, which would be expected in an increasingly tight labor market where workers have improved labor market prospects. However, it could also reflect a decline in accurate wage reporting. When we adjust for the possibility of workers rounding their wages down to the nearest dollar amount of $2 (known as rounding bias), about 60 percent of workers receive a wage near the federal minimum. The earlier mentioned decline is also gone. Just because there is a two-tiered system in place doesn’t mean workers who receive tips can’t earn high wages; however, this is rare. If we look at salaries that report a wage of $3 or less, the share of workers jumps to about 80 percent. When we break it down and look at the states where Glassdoor salary data are most available, we see that for the most part, these percentages are similar. About 40-50 percent of workers report a wage of exactly $2.13, which increases to around 55-60 percent when we consider rounding bias down to $2 and jumps to about 80 percent when we consider wages at or below $3. In our sample, South Carolina and Louisiana have the smallest shares of workers with wages at the federal minimum while Tennessee has the largest.

In States with Their Own Two-Tiered Systems, Most Food Service Workers Still Affected

Currently, 24 states and the District of Columbia have their own two-tiered system, with a minimum wage for tipped workers that is above the federal $2.13. The minimum wage for tipped workers in these states ranges from as low as $2.23 in Delaware to as high as $7.50 in Arizona and New York. Food service workers in these states are also affected by the two-tiered system. In 2017, more than 55 percent of food service workers in these states recorded a wage at or below the state minimum wage (note the potential for rounding bias, as previously stated)(3). This is a similar percentage to what we saw for states that used the federal two-tiered system. What this shows is that, regardless of whether it is $2.13 or more, many workers in the food services industry will be offered the lowest wage they can be paid. Even for workers that aren’t paid the lowest minimum wage possible, the two-tiered system is still very much a factor. When we consider workers who are paid no more than 50 cents above the state’s minimum for tipped workers, the share of employees jumps above 70 percent. Almost 80 percent of workers are paid only $1.50 more than the minimum wage. Even if a worker isn’t paid the minimum, their pay is likely close to it. Again, this doesn’t mean a worker who receives tips can’t earn a high wage. Employers may want to attract the best quality candidates by offering very high wages. If we look at food service workers who report receiving tips and a wage at or below the state’s standard minimum wage, the share rises to almost 90 percent. As such, not every worker in the food service industry has a wage that hovers near the two-tiered system, but most do.

Tips Are Vital to Worker Income, No Matter the Minimum Wage System

Regardless of a state’s minimum wage policy, food service workers critically rely on tips. Unsurprisingly, this is clearest in states with the federal two-tiered system. For a food service worker in one of these states, tips make up about 80 percent of their total pay on average. This drops to roughly 70 percent in states that have their own two-tiered systems. Even in states that don’t have a two-tiered system, tips make up more than 50 percent of total pay.

Wages are Rising, but Tips are Not

So are workers better off with or without a two-tiered minimum wage system?  Voters in Washington D.C. had to choose whether or not to abolish their two-tiered system in the summer of 2018. Advocates for retaining the current system championed the slogan, “Save Our Tips,” suggesting that food service workers would be better off with a two-tiered system because, without it, their tips would drop more than proposed wages would rise. We try to explore this question to the extent we can by analyzing how, when accounting for changes in the cost of living, wages and tips have moved over the past couple of years. In the figure below, we see that, unambiguously, workers receive higher total wages in states with more accommodating minimum wage laws. This, of course, isn’t too surprising. When it comes to wage growth, we see that states with the federal two-tiered system have seen little-to-no wage growth. For other states (either with their own tiered system or one standard minimum wage for all), wages have not only kept up with the cost of living but have outpaced it. Many of these states raise their minimum wages by law to keep up with inflation or have simply raised them in recent years to promote higher pay for employees. Tips, however, have a very different picture. When we consider changes in the cost of living, wages have risen for states with higher minimum wages while tips have fallen. This is clearest for states with no two-tiered system where all workers are subject to the same minimum wage. For states using the federal two-tiered system, tips per hour have not changed. What also stands out when we look at tips per hour is that the average doesn’t differ that much across state policies. States that use the federal two-tiered system have in general lower costs of living, which largely explains why they would have lower tips on average.

Why Do Tips and Wages Move Differently?

What’s behind this pattern of tips and wages moving in opposite directions? For one, it’s consistent with how a tipped wage system works. The total pay a tipped worker earns cannot be less than the minimum wage that non-tipped workers receive. If an employee’s total pay (wage, plus tips) falls below the standard minimum wage, then the company is legally required to cover the rest. So if tips fall short, the store must supplement the wages it pays its workers. This means wages in areas where tipped workers are paid very low would rise. Another possible explanation is that customers are simply tipping less. This could be the case for a few different reasons. If restaurants raise their prices to offset the increase in labor costs, customers might reduce the amount they tip since they are already paying higher prices. Hence, the economic underpinning for the “Save our Tips” campaign. However, a very different story that could equally account for this pattern is that customers’ tips are failing to keep up with inflation. If instead, restaurants are slow to adjust their prices -- an economic concept referred to as sticky prices -- and customers tip a constant percentage of their bill, say for example 18 percent, then tips would fail to keep up with the overall cost of living.

What Does This Mean For Total Pay?

By adding together wages and tips, we can see what has happened to total pay. In states that use the federal two-tiered system, food service workers saw a slight tick down in their total pay, reflecting the toll that rising prices can have on a frozen minimum wage system. In states that use their own two-tiered system, wages may have risen for many workers in the food services industry, but those gains were often offset by a decline in tips. In states that use a single minimum wage, food service workers enjoyed a boost to total pay. Even though tips fell for workers in these states, the jump in base pay -- fueled by rising minimum wage laws -- exceeded the decline in tips. Workers in these states (where there is no two-tiered system in place) also clearly took home higher total pay. It is worth noting that estimates for total pay using Glassdoor salary data are higher than what government data might report using other sources. There are several factors that may explain the still accurate, but higher reported salary data. These limitations include a larger percentage of salary data from bigger cities with higher costs of living in our sample, having to impute hourly wages and tips without observing total hours worked,  whether workers include tips in their salary report and whether workers are in fact part- or full-time workers. Since salary information on Glassdoor is volunteered anonymously, individuals who submit a salary report also have little-to-no incentive to underreport how much they may earn.

What’s Next?

As the push for higher minimum wage laws across the country continues, two-tiered minimum wage systems are likely to come under more scrutiny. Will any states do away with their two-tier system entirely? If so, how would employers respond to such a shift? Although voters in Washington D.C. favored phasing out the two-tiered system, the city council appears poised to overturn the measure out of concerns local employers might eliminate jobs or shut down their businesses entirely. It’s unclear what will happen next, but by taking a look at Glassdoor salary data, we can better understand how different wage policies can affect workers across the country.   Footnotes: 1.We are careful to avoid confounding sampling selection with meaningful movements in tips and wages by aggregating across job titles and cities using weights that are fixed across time at the average annual share of salaries each job title receives in each city. 2.New Jersey, New Mexico, and Nebraska use the federal minimum wage for tipped workers of $2.13, but have higher standard minimum wages than the federal minimum. For the purposes of this piece, we group these 3 states in with the other 15. For our analysis in this section though, we exclude New Mexico since some areas within New Mexico have their own separate minimum wages for tipped workers that are higher than the state’s. 3.This figure excludes states where minimum wage laws within the state changed during 2017 and Connecticut since its minimum wage laws are not the same across all workers within the food services industry.