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The effect of the minimum wage for tipped workers on firm strategy, employees and social welfare

  • Azar, Ofer H.

Millions of workers derive much of their income from tips and are subject to the “tipped minimum wage” that differs from the regular minimum wage. This article examines the implications of the tipped minimum wage and shows that increasing it may lead restaurants to adopt a compulsory service charge in lieu of tipping to extract the economic rent enjoyed by waiters under tipping. Because servers are better off with tipping, this implies that increasing the tipped minimum wage in an attempt to increase servers' income may achieve the opposite result. Moreover, increasing the tipped minimum wage may reduce social welfare.

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Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 19 (2012)
Issue (Month): 5 ()
Pages: 748-755

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Handle: RePEc:eee:labeco:v:19:y:2012:i:5:p:748-755
Contact details of provider: Web page: http://www.elsevier.com/locate/labeco

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  1. Ofer H. Azar, 2003. "The History of Tipping - From Sixteenth-Century England to United States in the 1910s," Economic History 0309001, EconWPA.
  2. Danziger, Leif, 2009. "Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms," IZA Discussion Papers 4320, Institute for the Study of Labor (IZA).
  3. Brown, Charles & Gilroy, Curtis & Kohen, Andrew, 1982. "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 487-528, June.
  4. Sen, Anindya & Rybczynski, Kathleen & Van De Waal, Corey, 2011. "Teen employment, poverty, and the minimum wage: Evidence from Canada," Labour Economics, Elsevier, vol. 18(1), pages 36-47, January.
  5. Matt Parrett, 2006. "An Analysis of the Determinants of Tipping Behavior: A Laboratory Experiment and Evidence from Restaurant Tipping," Southern Economic Journal, Southern Economic Association, vol. 73(2), pages 489–514, October.
  6. Ofer H. Azar, 2003. "What sustains social norms and how they evolve? The case of tipping," Others 0309001, EconWPA.
  7. Ofer H. Azar, 2007. "Do people tip strategically, to improve future service? Theory and evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 515-527, May.
  8. Lynn, Michael & Grassman, Andrea, 1990. "Restaurant tipping: an examination of three 'rational' explanations," Journal of Economic Psychology, Elsevier, vol. 11(2), pages 169-181, June.
  9. Azar Ofer H, 2008. "Strategic Behavior and Social Norms in Tipped Service Industries," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-18, March.
  10. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S87-104, August.
  11. Lynn, Michael & Zinkhan, George M & Harris, Judy, 1993. " Consumer Tipping: A Cross-Country Study," Journal of Consumer Research, University of Chicago Press, vol. 20(3), pages 478-88, December.
  12. John Anderson & Orn Bodvarsson, 2005. "Do higher tipped minimum wages boost server pay?," Applied Economics Letters, Taylor & Francis Journals, vol. 12(7), pages 391-393.
  13. Strobl, Eric & Walsh, Frank, 2011. "The ambiguous effect of minimum wages on hours," Labour Economics, Elsevier, vol. 18(2), pages 218-228, April.
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