The Economics of Real Waiter Wages

Minnesota State Rep and presumptive GOP gubernatorial nominee Tom Emmer got in hot water for proposing to cut waiter wages in the state, allowing restaurants to credit waiter tips towards minimum wage; effectively lowering their hourly rate by over $5 an hour.  And he justified that with his belief that many of these people make over $100k annually, and don't really need the extra money.  And hopefully, all of the Minnesota waiters who make over $100k will vote for Emmer, while the rest will vote for his opponent.

And one of the things Emmer used to justify his belief that this cut won't effect their wages was a study by two professors at the University of Nebraska titled Do higher tipped minimum wages boost server pay?  And I just had to read this study, because I find it mind boggling that you could somehow cut someone's wages without reducing their wages.

Here's what the professors had to say about it:

Do servers earn more in states with higher tipped minimum wages? We hypothesize no ceteris paribus premium to such servers. The reason is that the national market for servers is very competitive and we contend that it will equalize pay between states. Servers in states with lower tipped minimum wages may migrate to states with higher wages, or businesses in states with higher tipped minimum wages may relocate to states with lower wages. The resulting adjustments in server demand and supply will dissipate any interstate ceteris paribus differences in pay.

And I have two words for that: Uhm, no.  I can only imagine that these two professors have literally zero experience in the restaurant industry, as their vision of supply & demand as a corrective in this is entirely absurd. 

Real World v. Fantasyland

And the main problem here is that there is no national market for waiters.  A waiter isn't going to move from Arkansas to Minnesota for their higher minimum wage.  The waiter market is local only, and they compete to work for the best restaurants in their town.  Nor is a restaurateur going to close his restaurant in Minnesota and move to Arkansas to save on waiter costs.  That's absurd.  People just don't do these things.

And even their economics are wrong here, because supply & demand don't apply in this case.  Because it doesn't matter how many waiters move to MN for their better minimum wage; they'll still all be paid the same minimum wage and receive the same in tips.  Even an infinite supply of waiters won't make them get paid any less than the minimum wage. 

If anything, the higher minimum wage would force a restaurant to hire fewer waiters, so the waiters would make more in tips.  Or, the increased expenses would mean fewer restaurants would open in MN, so the remaining ones could charge more to pay for their more expensive employees.  But it doesn't matter what the supply & demand for waiters is, as their price still can't go below the minimum wage.

So not only is supply & demand not applicable to the waiter market, the minimum wage completely negates any effect it might have.  Honestly, if these professors haven't figured out how minimum wage affects supply & demand, they really need to go back to school.

Hocus Pocus Statistics

And so what could be the mechanism that would make it so increased minimum wages wouldn't increase actual wages?  Maybe it's because eaters know that their waiters already make minimum wage, so they tip less.  And that's fine by me, as I've never quite grasped the idea of mandatory tipping and would prefer that they be paid by the restaurant.  Or maybe it's because restaurant prices are too high, so people don't eat out as much.  Or possibly, just possibly, the results of the study are simply wrong.  And that is indeed the case.

First off, if you read their report, you'll find a bunch of statistical hoohaw that appears that they jimmied the numbers in order to flatten out any differences they would have found.  Basically, in their efforts of making "all things equal," they screwed with the numbers until everything was equal and then announced their findings that everything was equal.

And they never bother giving their results in actual numbers, but rather give you a chart that tells you (among other things) that Category 5 States have a 0.7820E-01 estimated coefficient, so you can't actual decipher their results.  They never translate this into numbers you can read.  For as much as I understand the need for statisticians to use jargon, I've generally found if they don't translate it back into English, they probably screwed with the numbers.

But then they have no problem giving you the final conclusion, which looks suspiciously like their original question, saying:

We conclude that, for the most part, servers in those states with higher tipped minimum wages appear to have no income advantage over servers elsewhere.

Surprise, surprise.  They take a bunch of numbers, run it through an incomprehensible statistical analysis, and presto change-o, come out of it with the exact answer they were looking for.  Well, not the exact answer, as they did find one group of states with higher paid waiters: States that had a real minimum wage. 

Real Wages = More Money

As they said, waiters in states that didn't allow tip credits were "paid a small premium relative to workers in states where there are no minimum wage laws."  Or written in English, waiters that received a real minimum wage got more money than waiters that didn't.  And, well, duh.  That's exactly what I'd expect to see.

In fact, the biggest problem with their study was that they focused on tip credits, rather than on actual minimum wages.  And that means they lumped states with real minimum wages with states with the bare minimum $2.13 wage, if they had higher standards including their tips.  But in the restaurant industry, these fake minimum wages are a sad joke, as restaurants generally don't pay extra to their employees on slow nights.  Trust me, I've done accounting for a few restaurants, and this isn't even the sort of thing they keep track of.  The waiters made $2.13 an hour, always.

So the proper standard should be how much a restaurant is forced to pay by law, regardless of these pretend tip credits.  And by that standard, it's fairly obvious that a real minimum wage makes a difference.  Here are the average wages paid for these categories, according to DOL's website and the numbers I crunched from the BLS:

$0 Min. Hourly - $18,134
$2 - $3 Hourly - $19,377
$3 - $5 Hourly - $19,496
$5 - $9 Hourly - $22,827

Wow, just like what you'd expect to see: The more a restaurant pays their employees, the more money they make; with employees in the highest category making almost $4700 more annually than those with no minimum wage.  Oh, and here's a shocker: The state with the highest minimum wage (Washington) has the highest waiter wages.  And of the top ten wage states, only three of them pay less than $5.50 an hour; while the bottom ten states only have one that pays more than that.

And just so you understand, those in the highest category aren't necessarily the most prosperous or most progressive states, as they include low population states like Montana, Alaska, and West Virginia.

Caveats

Oh, and there's a big caveat to all this: Most waiters don't report their real tip income, so these numbers aren't the real numbers anyway.  They report whatever the waiter got paid by the restaurants, plus whatever imaginary number they included in tips for tax purposes.  Some restaurants use a percentage to invent tip income, while others leave it up to waiter. 

And naturally, restaurants that get to credit tip-income towards minimum wage are going to be more strict about forcing their waiters to report real tip income than states that it doesn't matter.  And that's what's got to be going on here, as a quick analysis shows that tip income inexplicably goes down the more a waiter is paid.  Either people in Montana, California, and Alaska are the cheapest tippers in the country, or their waitstaff are under-reporting their tips.  Or perhaps it's because people tip less when they know their waiter's already being paid a real wage.  But in any case, it's still better to get that minimum wage than not get it.

And how about Minnesota waiters, you might ask.  They reported making an average of $22,730 for 2009, a little below the $100k Emmers talked about.  But still, it's over $3300 more than waiters in states that have policies Emmers want to emulate.  Now, maybe Emmers is cool with taking a 15% paycut to save his boss some money, but I suspect the waiters of MN might disagree.

And the most important take from all this: You really shouldn't listen to economic professors who apply economic theories to areas they don't apply.  Yes, it'd be great if people were numbers which easily flowed to where they benefited the most economically, but in real life, people have other reasons for living somewhere than their state's wage laws.  If someone moves to CA or NY to become a waiter, I suspect it has more to do with the screenplay they're trying to sell than the minimum wage they'd get waiting tables.