Change is coming, at least at a few U.S. restaurants.

Photographer: Akos Stiller/Getty Images

Tipping Is Strange, and Strangely Hard to Get Rid Of

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Restaurateur Danny Meyer is planning to eliminate tips at his restaurant group’s 13 restaurants by the end of next year. Among other things, the New York Times suggests this will lower the disparity in pay between the back of the house, which makes an average of around $12 an hour, and the servers, who pull in considerably more than that.

Meyer is part of a small but interesting movement among restaurants and bars. A bar without tips just opened near my house in Washington; New York has a few places that no longer support tipping. Prices will naturally have to rise to reflect increased labor costs. Meyer says that servers' incomes will not fall, but I am skeptical on this point. But it will certainly be interesting to see if Meyer manages to slay tipping -- and if so, whether other restaurants will follow suit.

To get a sense of whether this is likely to work, it seems worth asking: Why do we tip? Tipping is, after all, a rather strange custom. We tell ourselves that it exists to ensure good service, but in fact, most people are very reluctant to undertip even when the service has been appalling. They follow the norms of tipping even when they are never going to see that waiter again, and therefore don’t need to worry about retaliation. Meanwhile, all sorts of things seem to affect tipping that have nothing to do with the quality of the service, like the race of the server and whether they put a smiley face on your check (though apparently this only works for female servers).

It’s evidently possible to run a service industry without lavish tips, because many places in Europe don’t tip, or don’t tip on anything like the American scale. I’ll never forget the evening that a German acquaintance, in possession of a lavish financial-industry bonus and an impromptu ticket to New York, took me on a tour of the city’s more luxurious hotspots. It was only at the end of the night, when he didn’t tip the coat-check girl, that I realized that we must have left a trail of fury behind us all evening. Another friend claims that in Sweden, a lovely teenage server once ran out of a restaurant and chased him down -- because he’d forgotten his money on the table.

So if it’s not about rewarding good service, why do we tip? Notice that we do it in some circumstances, but not others. We tip the bellhop, but not the clerk at reception. The waitress, but not the person behind the Target checkout counter. These disparities offer our first clue to the mystery: We tip people who are providing the services that used to be performed by household servants, but not the people who do the jobs of tradesmen or retail clerks. It’s possible that this grew out of the old tradition of tipping servants when you went to stay at someone’s house.

But that only gets us so far, because it doesn’t explain what purpose this ritual serves. The most promising theories of tipping are as follows:

  1. It is about envy. In a 1972 paper titled "The Anatomy of Envy," anthropologist George Foster argues that tipping functions the same way that gift exchanges worked among our hunter-gatherer ancestors. In small communities, people who have better fortune or success than others are targets of envy. The targets of envy use gifts to mitigate those feelings, lest their neighbors decide to destroy the object of their covetousness. This may explain why the custom seems confined to relatively intimate services, which maximize the discomfort of having more than someone else.
  2. It exploits pricing irrationality. The true cost of a meal is the price of the food and drink, plus the tip you will feel honor bound to leave. But people aren’t necessarily so good at doing those calculations. In the same way that airlines lure you in with a cheap fare and then pile on costs for baggage and food, restaurants may maximize their revenue by declaring a lower cost for the meal, and then having customers pay the wait staff separately. This is why restaurateurs are afraid to move away from the tipping model; they’re afraid they’ll lose customers who do not view a $20 meal with a $4 tip the same way they do a $24 meal.
  3. It’s tax arbitrage. Tip income is supposed to be declared on your taxes, but -- I know this will shock many of you -- it often isn’t. This saves restaurateurs their portion of the payroll tax, and allows servers to enjoy a healthy dose of tax-free income. The benefits of this tax arbitrage have been disappearing as credit card tipping has become ubiquitous, and this theory would predict that the rarer cash tips become, the more we’ll see a move away from tipping.
  4. It gives servers higher average incomes, at the cost of more volatility. Serving is somewhat feast or famine. At an ordinary restaurant, the difference between what you make on your slowest night and your best could run 100 percent. In general, you have to pay people to accept more income volatility, which may explain why wait staff make so much more than people in the back of the house. For young people without a lot of fixed expenses, this is a relatively attractive deal.

Given these theories, what should we expect from a move away from tips? The obvious one is that prices will go up somewhat, while I’d expect server income to fall, especially after taxes are taken into account.

Now, a very successful restaurateur like Meyer, who fills his tables pretty easily, may be able to negotiate that transition. He’ll have a decent margin to increase server wages, and many of his customers probably aren’t terrifically price sensitive. He may even attract customers who prefer not to think about tipping, and servers who prefer a steadier wage.

But across the industry, this transition will be harder. Many people make a habit of checking menu prices before they book a restaurant; they may not notice that the price includes service, and may therefore decide to go somewhere else. Entrenched customs represent a social equilibrium, and moving away from that equilibrium is difficult to do on your own.

Waiting tables will probably become a somewhat less attractive job as taxes rise and wages fall. And I would expect the quality of service to decline somewhat, because tips are (very slightly) related to the customer’s experience. Waiting tables is a job that’s easy to do badly and comparatively difficult for managers to monitor. There’s a reason that those sorts of jobs frequently pay on commission.

Many people argue that tipping is inefficient and offensively paternalistic. But even if you agree -- heck, even if a majority of your society agrees -- that doesn’t mean it will be easy to switch to a better model. Doing so will require resetting a lot of expectations all at once.

Entrepreneurs do occasionally succeed in changing industry business models, even ones as ubiquitous as tipping. But this is bigger than a business model. Others have tried before to change powerful social equilibria. Few have managed to, er, tip the scale.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net