July 18, 2018

Restaurant Tips Shouldn’t Subsidize a Lower Minimum Wage

By Dr. James A. Parrott

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New York State took a bold and important step in September 2015 by adopting a phased-in $15 minimum wage for fast food workers at chain restaurants. That was followed by the even more important step of adopting a phased-in $15 across-the-board minimum wage in April 2016, becoming the first state, along with California acting at the same time, to adopt a statewide $15 minimum wage.

By all accounts, New York’s rising wage floor has helped lift wages for millions of low-wage workers, benefitting over one-third of the state’s workforce. In New York City, the minimum wage has risen from $7.25 an hour in 2013 to a range of $12.00 to $13.50 today. It has also helped give us a more balanced and sustainable period of economic growth. Inflation-adjusted hourly wages have risen across the board in recent years, lifting median family incomes after years of stagnation in the first few years of recovery from the 2008-09 Great Recession. Since 2013, real wages have grown by about 11 percent in the bottom third of the city’s workforce, where minimum wage effects are mostly felt.

Workers of color, who are over-represented among low-wage workers, have shared in New York City’s wage growth. From 2013 to 2017, inflation-adjusted median wages for black and Latino workers in New York City rose by about nine percent, surpassing the five percent growth in the median wage for non-Hispanic white workers. Strong job growth and sustained record low unemployment have certainly helped, but New York’s rising minimum wage floor has been instrumental in these very positive economic results. By these and other indicators, we are seeing the best broad-based economic results in New York City since the 1960s.

Now New York State should join seven other states (Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington) in eliminating the tipped wage subsidy provided to restaurants and other employers, which creates a two-tiered minimum wage that allows employers to count customer-provided tips as part of employee compensation. The states that have already done that all have fairly prosperous restaurant industries, and a continued practice of tipping wait staff for good service.

Statewide employment in both limited-service and full-service restaurants has grown impressively in the years since the general and the fast-food minimum wage hikes. Employment in limited-service restaurants has increased an average of 3.6 percent annually over the past four years, and 2017’s 4.1 percent growth was higher than in the three prior years. For full-service restaurants, employment rose an average of 2.9 percent per year over the past four years, and 2017 job growth exceeded that of the year before.

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Much was made in the past year about a claimed decline in the number of restaurants in New York in 2016. It’s pretty clear that there must have been an administrative reporting problem—in the recently released data for full-year 2017, the State Labor Department reports 10 percent-plus increases in the number of limited-service and full-service restaurants in 2017.

One of the ways that New York City restaurants have been adapting to the higher minimum wage floor or cash wage required is through modest price increases. The NYC metro Consumer Price Index component for “food away from home” is a good proxy for restaurant prices. Over the past four years, food away from home prices have been rising by an average of 3.25 percent annually. This seems like a very reasonable response, effectively shifting some of the cost of higher minimum wages to consumers (whose incomes have been rising fairly steadily over this period).

Based on New York’s own experience in raising the minimum wage and the experience of the seven states that have eliminated the tipped wage credit, New York should begin to phase out the two-tiered minimum wage. In the hospitality sector, in particular, Labor Department data on employment, wages, and the number of restaurants show the beneficial effects of higher wages, as average and total wages have also risen steadily over the past four years for both full- and limited-service restaurants.

Still, according to Labor Department data from the Occupational Employment Survey, median wages statewide for waiters and waitresses were only $11.24 last year, and median wages for bartenders were only $11.45. And it is particularly concerning that tipped workers are disproportionately likely to live in poverty, with a poverty rate more than twice that for workers overall (15 percent compared to 6.2 percent.)1

The cash wage that New York currently requires employers of tipped workers to pay is about two-thirds of the broader minimum wage. Elimination of the tipped credit wage subsidy is feasible and would continue the impressive progress that the State has made in recent years in lifting wages at the bottom. Eliminating the tipped credit would make it clearer to restaurant customers that tipping is a way of “thanking” servers for good service, and it would better facilitate effective enforcement by the Labor Department against all-too prevalent wage theft.

Photo by: Jim Pennucci

1 Sylvia A. Allegretto, Should New York State Eliminate its Subminimum Wage? Center on Wage and Employment Dynamics Policy Brief, April 20, 2018, University of California Berkeley Institute on Labor and Employment.  

Dr. James A. Parrott is Director of Economic and Fiscal Policies at the Center for New York City Affairs at The New School. This is adapted from testimony he gave to the New York State Department of Labor on June 27, 2018.