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The Effect of Tip Credits on Earnings and Employment in the U.S. Restaurant Industry

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Author Info

  • Even, William E.

    ()
    (Miami University)

  • Macpherson, David A.

    ()
    (Trinity University)

Abstract

According to federal law in 2012, employers can take a credit of up to $5.13 for tips received by workers in satisfying the minimum wage requirement of $7.25. This study uses interstate variation in laws regarding tip credits and minimum wages to identify the effects of reducing or eliminating the tip credit on employment and earnings in the U.S. restaurant industry. Using data from the Quarterly Census of Employment and Wages and the Current Population Survey, we find that a reduction in the tip credit increases weekly earnings but reduces employment in the full services restaurant industry and for tipped workers. The results are robust to controls for spatial heterogeneity in employment trends and are supported by a series of falsification tests.

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File URL: http://ftp.iza.org/dp7092.pdf
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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7092.

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Length: 33 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:iza:izadps:dp7092

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Related research

Keywords: earnings; cash wage; tipped workers; minimum wage; tip credit; employment;

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References

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  1. Daniel Aaronson & Eric French, 2003. "Product market evidence on the employment effects of the minimum wage," Working Paper Series WP-03-17, Federal Reserve Bank of Chicago.
  2. Dube, Andrajit & Lester, T. William & Reich, Michael, 2010. "Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties," Institute for Research on Labor and Employment, Working Paper Series qt86w5m90m, Institute of Industrial Relations, UC Berkeley.
  3. Wessels, Walter John, 1997. "Minimum Wages and Tipped Servers," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 334-49, April.
  4. David Neumark & William L. Wascher, 2008. "Minimum Wages," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262141027, December.
  5. Allegretto, Sylvia & Dube, Arindrajit & Reich, Michael, 2010. "Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data," Institute for Research on Labor and Employment, Working Paper Series qt7jq2q3j8, Institute of Industrial Relations, UC Berkeley.
  6. Joseph Sabia, 2009. "The Effects of Minimum Wage Increases on Retail Employment and Hours: New Evidence from Monthly CPS Data," Journal of Labor Research, Springer, vol. 30(1), pages 75-97, March.
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Cited by:
  1. Allegretto, Sylvia A., 2013. "Waiting for Change: Is it Time to Increase the $2.13 Subminimum Wage?," Institute for Research on Labor and Employment, Working Paper Series qt3zx9v0zk, Institute of Industrial Relations, UC Berkeley.

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