Should Tipping Be Banned? A Freakonomics Radio Rebroadcast

(Photo: Aaron Stidwell)

This week’s podcast is a rebroadcast of our episode called “Should Tipping Be Banned?” (You can download/subscribe at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript; it includes credits for the music you’ll hear in the episode.)

As we all know, the practice of tipping can be awkward, random, and confusing. This episode tries to offer some clarity. At its center is Cornell professor Michael Lynn, who has written 51 academic papers on tipping.

The practice of tipping is one of the most irrational, un-economic behaviors we engage in. It’s not in our economic best-interest to tip; essentially we do it because it’s a social norm — a nicety. In this episode of Freakonomics Radio, Stephen Dubner looks at why we tip, what kinds of things can nudge tips upward, and what’s wrong with tipping overall. Research shows that African American waiters make less in tips than people of other races, so tipping is a discriminatory practice. In the end, we wonder whether or not the practice of tipping should be eliminated altogether.

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  1. Tim Skarratt says:

    The original meaning of the form TIP is “To Ensure Promptness” and was originally paid at the beginning of a meal or service. It was given to the maitre d or the table staff to ensure a good table and good service from that moment onwards. The more you gave in a tip the better service you were sure to receive.

    The act of paying a tip after the service as is the norm today, and is a great way of showing your gratitude for those who provide above standard service (standard service is your basic wage and your job). The area I have a problem with is the way in which restaurants place a 12.5% tip or service charge onto your bill automatically, therefore removing your ability to reward someones expectational service or not provide it in the case where an individual provided adequate or sub standard service. In fact you can end up looking “cheap” or “rude” if asked to be taken off.

    What is worse is that the larger chains take 40% of this tip/service charge away from the employees and put it into their own pocket. Therefore reducing the point of the tip, the set price is for the meal and all that goes into its preparation, the tip is exclusively for the wait staff or those who you feel added to your experience.

    Hot debate. What do you think? Thumb up 22 Thumb down 19
    • Alex says:

      http://www.snopes.com/language/acronyms/tip.asp

      It isn’t an acronym.

      Your other points are good though.

      Well-loved. Like or Dislike: Thumb up 19 Thumb down 2
    • bob@gmail.com says:

      WTF are you talking about? I’ve never heard of a restaurant adding a 12.5% tip onto your bill. IF you are part of a large party, then yes, a mandatory 15% tip is often added. That doesn’t stop anyone from tipping on top of that, thuogh, so your point about losing your ability to reward great service or penalize cheap/rude waiters is moot. Unless of course, you meant to penalize them by tipping even less than 12.5%, which is, given general current tipping practice, pretty hostile. They’d have to have been truly awful, which in some cases, they may be.

      I don’t even know where this 40% BS came from. No chain is taking 40% of its waiters’ tips. Sometimes the tips of all waiters on duty during a particular shift are pooled and then split among the waitstaff, and often a server will have to give the bartender a portion of their tip $, if said bartender made drinks for that waiter’s tables.

      Thumb up 1 Thumb down 1
      • Industry guy says:

        “The practice of tipping is one of the most irrational, un-economic behaviors we engage in”

        I would have to disagree. Tipping incentivizes good or exceptional service and incentivizes your waiter to in some cases work exceptionally hard to provide that service. You could make an argument that a tip as a percentage of the meal should be lower (e.g. raise waiters wages by the equivalent of 10% of their sales and then make a 5%-10% percent tip the norm in place of 15%-20%). This would be more fair to waiters as there income would not depend on the tipping habits or generosity of their customers and it would still incentivize good service.

        @ Tim Skarratt

        In regards to the 12.5% gratuity added (it is usually 15%) where I live. This is only added to larger parties generally in recognition of them being much more work for the waiter and a much more substantial portion of his/her tips for the night. Many people don’t tip based on service, there are simply bad and good tippers out there and it really sucks to receive next to nothing on a 200-300 dollar tab.

        I think you need to keep in mind that 12.5% IS a bad tip. You have lots of room to express your gratitude. 15% for decent-good service 20% for good-great service and
        %20+ for anything beyond that.

        Keep in mind that waiters are doing a hard job and in most states the restaurant pays them next to nothing. The Federal MINIMUM WAGE FOR WAITERS is $2.13 an hour (that’s $80 for a 40 hour work week). Waiters rely on tips to survive and if you wish to express your dismay with service talk to them, talk to a manager, or leave 10%-15% percent. You will get your point across better and actually maybe help the individual improve their service rather than coming across as cheap.

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  2. Johanna says:

    Interesting episode! I had one thought on it though: How come Michael Lynn chose to compare different groups (blacks, Hispanics and Asians) to whites? Why not compare Hispanics to blacks, for example?

    Thumb up 6 Thumb down 3
  3. DW Horton says:

    What about something like this… at the end of your meal, you’re given a number of beans based on, say, 20% of the value of the meal. The number of beans you leave at the table is your tip, and the server can cash them in at the end of the night for cash or some other benefit.
    The server is directly compensated for good service (or whatever else people tip for), the restaurant owner is able to measure which servers are performing well or poorly, and the guest pays the menu price for the meal. Like my grandpa used to say, “what you can measure, you can manage”.

    dw

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    • John says:

      We already have a standin for those beans, we call it dollars and they’re very measurable. I don’t think this does anything to address the discrimination and arbitrary nature of tipping, it just adds another weird ritual.

      The only difference this could have is if you decide not to give the full 20%, the remainder goes to the pool of money and the amount of beans you get is a weight in your share of the pool. All that means is if someone gets a lower tip, everyone else gets a higher tip. This is all just adding to the silliness.

      Well-loved. Like or Dislike: Thumb up 6 Thumb down 1
      • 14244994 says:

        John I couldn’t agree with you more,the “bean tip” just even goes further to affect the motivation of the workforce and adds to frustration. People make a living out of earning tips plus wages.
        Anyway I don’t think that everybody has a good day or morning in order to leave a dollar or two as tip for the waiter. Putting ones self in the shoes of the waiters and waitresses can really show how hard it is to put bread on the table and pay that rent at the end of the month.

        Thank you for the eye-opener.

        Thumb up 1 Thumb down 0
  4. Don Donaldson says:

    Oh my goodness… I think you got wrapped around the axle on this one. Wooly, is right Dubner.

    I think the problem, among other things, is: the purpose of tipping.
    Let me also say that I think, tipping hurts every body in the restaurant, customers, owners, workers.

    Lets start with restaurants.
    I’ll also bet that if you could “mine the data” you would find that tipping a % of the bill didn’t exist at the beginning of the development of restaurants. Restaurant workers came out of the Aristocrats households after the French Revolution and were professional. In that they were trained. Restauranteurs included the cost of employing these people in the bill like they did while working for the royalty before. Chefs submitted a bill to the house’s accountant, it included all costs to run the kitchen staff and the Barron or Marquis, or whatever the title was, paid.

    This still goes on in restaurants in France. At least when I was there last time. It has been a while.
    It is a standardized service and it is charged as such.
    Coffee= 2 Franc
    Croissant=2 franc
    service=2 franc
    tax=2 franc

    This is, as I see it, the best scenario. When you have a professional staff that provides a standard service.

    You are not allowed to pay what you feel like for your food. If its not good you send it back. If you don’t like the dish you pay for it and don’t order it again on return visits or ask for another menu item. Why should you pay what you feel for the other cost, service? The answer it varies wildly because there is no professional server position in the restaurant industry.

    I’ll also bet that the custom of tipping a % of the bill started when the class of professional server started to disappear and it has.
    I think when you go to an average restaurant nowadays in America you, neither will be served by a pro, nor will your food be cooked by one. They may do restaurant work for a living but not be pros. Yes there are lots of exceptions but…on average I think this is true.
    All of the tricks that were talked about in the podcast, pros don’t need to do that.

    Restaurant owners… Most restaurants need to operate on the edge of chaos to be profitable. Many restaurants are built, staffed, financed and operated not to provide the best of anything when seated to capacity. To do so would be super expensive. They have too many seats to too little equipment and staff. Managers are reluctant to make customers wait at the door. They feel that people might leave while waiting at the door too long. They would rather have them wait at a table or bar with an open check with drinks on it, this influences the customer to not leave.
    So managers over staff and drive up their labor cost. To counter this, server’s wages have been developed or evolved. The agreement is that the restaurant will pay sub minimum wage and pay the waiter in a check, if tips don’t equal $7.50/hr. Don’t forget the bus staff are tipped by the servers.
    So restaurant owners and managers when they can, almost, over load the kitchen. When this goes bad is when they over load. On the edge of “lack of control” raises total average $ that the servers make because they make money on a % of the check. But holds down the quality of service and the % average. Based on the floating % assigned by the customer model.

    Where did % come from? Was back when I was a young cook. 15% was standard. as of 2006 18% was considered standard by a lot of customers. Ask a server and 20-25% is or should be the norm.

    Probably, owners and managers and servers did some math and figured that 15% was about the average $ amount that would bring up the total $ amount that servers made so owners didn’t have to supplement servers checks, who made less that the required amount of tip to make minimum wage. This established itself over the years by suggestion, maybe promotion. People took the advice and there it is. Minimum wage went up, 15% tip became the standard and server could make a living.
    Until it didn’t. Then servers started to suggest 20%. I think this started about 2000.

    Here’s where the edge of chaos comes in.

    The balance of almost too busy, almost under staffed: to providing acceptable quality of food, and acceptable service is the best place for everybody based on a method of compensation for servers that is sort of subjective.

    If a service fee were charged as an item on the bill, paid by the customer to cover the cost of employing the server and busser a couple of things could happen. The cost of providing better service would be covered. The restaurant could require a higher skilled worker and raise the level of service and maybe the menu prices. They could hire better cooks serve better food, and be more profitable.
    Gratuity could be restored to it’s intended purpose. If the customer wanted to leave an additional tip for exceptional service that’s fine bit not required.

    Compare tipping in a restaurant to lets say a doorman. According to an article in New York Magazine a union doorman makes $32,000 a year add in a $5000 gratuity.
    If a server average 20% over the year. That’s not so bad, at least compared to NYC doormen.

    http://nymag.com/nymetro/news/bizfinance/finance/features/4086/

    Me as a Chef would of course choose my model. I’m interested in providing a standard.
    Owners don’t have that luxury . They need to pay the bills and make as much money as possible, now. Most cant place that bet.

    Jon Bon Jovi’s Soul Foundation runs a restaurant, Soul Kitchen in Red Bank NJ, that is pay what you want or can. No for profit restaurant can take that chance without some sort of backing. I don’t know how Soul Kitchen does. It is a non profit.

    I wont argue about the origins of tipping. That is legend now. There is probably no single true story.

    Currently, I don’t think there is a problem problem with a charge for a gratuity for parties of X or more when they are spontaneous no reservations.
    It does incur a cost to everyone in the restaurant to remove one server from the floor in that maybe there will be too great of a work load on other servers to serve the other customers well.

    Also Customers break the % for tip compact when their Parties of 20 get expensive.
    Why should they tip XX% for 20 meals eaten out separately and -xx% when eaten all at once.
    The larger the bill the smaller the %. This is fact.

    The above is my opinion is based on 2o years working in restaurants and seeing this go on.

    Hot debate. What do you think? Thumb up 12 Thumb down 9
  5. Katie says:

    Restaurant serving is also a sales job. I work part-time as a server in addition to my full-time teaching job. It is difficult work.
    I’ll admit that I would be less likely to serve as my part-time job if percentage tips were taken away and instead I was paid a higher wage. I am motivated by wage incentives. The harder I work, the more tables I serve, the greater sales I make, the higher my take-home at the end of the night. (Versus my teaching job where the harder I work the harder I work and the pay stays exactly the same. Believe me; it’s a hard to rationalize.)
    If I was paid a consistent hourly wage with the restaurant prices being raised to compensate, then I would be less likely to push the sale of additional beverages or salads/desserts in addition to entrees, as these would require more visits to the table without any additional compensation. I would also slow the turn of my tables by slowing down the food service or check delivery, because I would have no incentive of getting the next table (and doing more work).
    If percent tips were taken away, then other incentives would have to be put in place by the employer to ensure higher sales.
    The questions was posed: would it be detrimental to an employer to do away with tipping? Yes. I anticipate that restaurant sales would decline.

    Well-loved. Like or Dislike: Thumb up 13 Thumb down 5
    • Oliver H says:

      I disagree. You might make more on any given evening, but the people who feel pushed to buy more might be disinclined to come back, costing the restaurant in the long run.
      You DO have an incentive to serve promptly: The welfare of the restaurant which employs you. If it becomes known for poor service and has to shut down, there goes your job right with it.

      And that’s supposing you do not have any shred of pride in you. If your job is such a chore for you, may I suggest you look for something you actually ENJOY doing?

      There’s countless countries out there in which tipping is reserved for truly exceptional service – or simply restricted to rounding up the bill.

      Hot debate. What do you think? Thumb up 14 Thumb down 16
    • Chris says:

      One could argue that you “incentive” would be continued employment and raises if you are good at the sales side of your job.

      Well-loved. Like or Dislike: Thumb up 9 Thumb down 3
      • Katie says:

        Yes, a raise would be an incentive, a new incentive that the employer would have to put into place. In the current system, servers never earn a raise. That is not an offered incentive. The base rate (in my state, it is $2.13) stays exactly the same no matter how long an individual is employed and does not reflect sales or other beneficial marks or contributions.

        Thumb up 3 Thumb down 0
    • Don says:

      Serving is ridiculously hard work. I hated it almost as much as roofing. It wasn’t for me.
      People who do it are some of the hardest working people I know. What makes it worse is that because of the random nature of how you make money. If you take care of a table very well, sell an extra course and then get stiffed by a jerk really does suck.

      Thumb up 4 Thumb down 5
    • John says:

      Oh there’s still incentive. You get to keep your job.

      But if you want to consider it a sales job, there’s a heck of a lot more reasonable way to do it – pay employees a percentage of the sales and raise prices to make up the difference. Done. No more insanity. If you wait more tables, sell more drinks, you *actually* make more money, not just hope you hit the jackpot on the tippers.

      And if employers don’t want to raise prices and do this, then they get to deal with lower quality wait staff which will hurt them. So the incentives are still there.

      Well-loved. Like or Dislike: Thumb up 7 Thumb down 1
      • Katie says:

        Maintaining employment is not an incentive. Losing employment could be a consequence of (in)action, but keeping the job I already have is not an incentive.

        I do agree that being offered a percentage of my sales could be a worthwhile alternative to the current system.

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    • Enter your name... says:

      I don’t know. Maybe I’d go out to eat more, if all the “Katies” on staff weren’t stretched so thin. Given the way the system works, I can see that the incentive is for you to provide mediocre service to six tables instead of good service to four tables. But what’s the incentive for me to come back to the restaurant that employs servers like you?

      Thumb up 3 Thumb down 2
      • Mike says:

        Couldn’t agree with you more. Servers like this may do well in the short term, but they sink the ship. They create unhappy customers, cause bad reviews, and make it generally unpleasant to show up at their restaurant.

        Thumb up 1 Thumb down 1
    • Mike says:

      Katie – I think you’ve struck what I think is one of the biggest problems with tip culture. Working in a restaurant is NOT a sales job, it is a service job. Your job shouldn’t be to hustle as large a check as you can in as little time as possible – however, the way server compensation is structured encourages this kind of behavior. Because of this, the incentives of the server are not always aligned with the wishes of the customers. When most people go out to eat, they are seeking out an experience. Whether it’s about the food, not having to cook/clean, or just enjoying a night out The last thing people want is to have beverages, appetizers, desserts, etc. forced on them that they don’t actually want. Actually, if I feel a server is pushing me to order additional things I don’t want, I will usually tip less.

      As with anything, the price people pay should related to the value and quality of the experience. In Europe, restaurants tend to be more expensive than in the US, tips are lower, and server pay is higher. I don’t know whether this nets out to better pay for the servers, or better business for the restaurants, but it certainly makes for a better dining experience and happier customers. You can order a coffee and sit for an hour enjoying it. In the US, you will be handed a check and asked to leave after just a few minutes.

      I don’t know about anyone else on here, but I’d hate to have you as a server. And if you or anyone else served me in the way you are describing, I’d never come back.

      Well-loved. Like or Dislike: Thumb up 6 Thumb down 1
      • Katie says:

        Mike,
        I think you would have a wonderful experience in my restaurant and in my section with my service. I do very well in my part-time serving job. I have lots of regulars and receive a great number of compliments as well.

        I’m commenting on these posts not from the service angle but from the monetary and pay structure angle. I don’t push sales on my customers. You have the power to say no to anything I offer. But I do want you to know what we have to offer, and I desire to enhance your restaurant experience by ensuring you are informed and aware of what items we do offer. I want you to have the experience you are seeking. If your experience includes an appetizer, great. You’ll be dining longer than the guests at the table next to you, probably. If your experience does not include an appetizer, that is also fine, but I don’t know if I don’t ask.
        One of the things I enjoy most about my job is doing my best to provide each unique group the unique experience they are seeking. You are correct when you say that people are there for different reasons.

        One group may want to eat and go while another group wants to stay and socialize the night away. Some people love server/guest interaction. Others want the server to be inhuman and silently serve with the skill of a magician. Part of my job is to communicate with you well enough and read your body language to determine the experience you are seeking. It’s a powerful social experience and enhances my social intelligence.

        I imagine that you are seeking the best compensation possible in your employment. Understand that I am as well. You get the option to make or break my experience with you by the way you treat me as your server both in the way you interact with me as well as the tip you choose to leave. I provide the very best service possible to every guest in my restaurant. I risk the chance of serving a guest who doesn’t understand the nature of our exchange of service; I do my best and you compensate that. I hope you come in optimistically, because that is how I enter my restaurant and approach each table. Let’s agree that I will do my very best to serve you and provide you the experience you are seeking, and you will treat me with dignity and provide me the agreed upon tipping rate for your meal and experience. Understand that if you request things that require me work harder, even if it isn’t reflected in the bill, then you’ve received additional service and should compensate me for that additional service.

        Allow me to share a story from the guest point of view with the knowledge of a server. I went to lunch with some coworkers last week. The group wanted Pho. I tried to talk them out of it, because we didn’t have much time. We had 45 minutes and my experience with this type of meal and restaurant suggested we wouldn’t have the time to enjoy the experience they provide. They insisted and we went anyway. One coworker mentioned to the hostess that we were on a tight schedule. The hostess relayed the information to the server. The server approached our table and communicated that they may not be able to expedite the service/meal they normally provide with a group as large as ours, acknowledging also that a lunch rush may also hit and affect the timing of our food/service. She said she would do everything she could to expedite the experience but wanted to forewarn us. I was incredibly pleased that she would communicate that so that we knew what to anticipate or so that we could choose to dine elsewhere, but my coworkers were annoyed. The server was incredibly attentive and was, in fact, able to serve us start to finish within our 45 minutes. When it came time to pay, a couple coworkers were still grumbling about the forewarning and were quite stiff with their tips, paying minimal amounts. Instead, I recognized the effort that the server and support staff had made to provide us the experience we were seeking, an experience that was different than their norm, and tipped her very well and even called the restaurant later that day to extend my compliments and gratitude.

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    • Joe D'Anger says:

      Hmmm I always thought it is the person you are selling on behalf of that should be remunerating you for the sale, not the person you are making the sale to. Granted prices would rise for the owner to cover the increased staff wages but still the whole system of low wages + making up the difference with the tips does not make sense to my feeble mind as a sensical practice. Pay servers a living wage and that’d be the end of it!

      Well-loved. Like or Dislike: Thumb up 5 Thumb down 0
    • caleb b says:

      As a former server, I agree…keep tipping. I worked harder and turned more tables because of tipping. Additionally, I made more money than the lazy servers. In 2000 I was averaging $15/hr in Oklahoma.

      All the no-tipping/pay-a-living-wage crowd can just guess if I would have made that if the wages were set by my employer.

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  6. Clint says:

    What percentage of the $40 billion per year in tips gets reported for income tax purposes?

    Well-loved. Like or Dislike: Thumb up 15 Thumb down 2
    • Jeff Surratt says:

      What people who work for tips that do not get reported ($20 or more per month are to be reported and taxes paid.) do not realize is their Social Security check when they retire will not include their tip income SS taxes and be used to calculate their benefit check; at a time when they could use a bigger check. Some workers tips make up to half of their income and by not reporting and paying the taxes now; will make for a hard retirement later in life.

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  7. leigh ratcliffe says:

    I just listened to this podcast (again) and again was wishing you had addressed one issue I see with tipping. Just after I graduated college I worked in the SCUBA and travel industries for a few years and essentially lived off of my tips. What I noticed is how little anyone in these industries is actually paid by their employer. Even when I was a divemaster, purser and crew member on board a relatively large ship I made most of my money off of tips. A divemaster alone is a pretty highly trained individual responsible for your life when you are underwater and I was surprised at how little the average salary is for this occupation. So my question is: when an employer knows their employees will make money off of tips do they pay them less? And if so, the probable correlation between tip size and what you look like really starts to matter, doesn’t it?

    Well-loved. Like or Dislike: Thumb up 9 Thumb down 0
    • Don says:

      First question: Of course, owners will always look to cut labor costs. Labor drives up costs. if you took what you made as a diver and applied it to what the owners need to charge for the service it would drive up the cost to the customer and probably drive down sales.
      Employees and employers agree on the model of tipping. Owners will will ALWAYS lower labor costs and people who choose serving are willing to take that gamble.
      Second: unfortunately looks matter to many people.

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  8. Elizabeth P. says:

    I wish that somewhere in this episode the fact that servers in the restaurant industry are legally paid less than the minimum wage. Tips increase their wages to the degree that servers can earn a living wage doing a demanding job. Without tipping, would all restaurant owners be willing to increase prices and return all of that increase over to the employees who used to earn tips? I doubt that is how it would play out.

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    • Joe J says:

      Employers would definitely pay more, but all of the increase? probably not.

      A better question if employers paid them more, would waiters spontaneously stop accepting tips, or tell anyone they are making more? Or try to get rid of the social convention of tipping as a guarantee? I think not.
      Just like when they include an auto gratuity on the bill, they don’t mention it in the hopes you accidentally double tip them.
      Humans are greedy not just employers.

      Thumb up 1 Thumb down 0
      • J says:

        How is that a better question? It is a completely unlikely scenario that waiters wages would be raised across the board without the public hearing about it.

        In terms of Gratuity added. Some shady individuals may try to set themselves up for a double tip. Most do not. I have personally returned a tip on one occasion when I thought the customer had not seen that gratuity was included. If gratuity is included for large parties it is listed on the menu and is also present on your check at the end of the meal. It doesn’t take much effort to scan your receipt and check if you are unsure whether it is included.

        Sometimes I mention the gratuity is added other times I do not. This is based on my read of the table. Some people are grateful a gratuity has been added and it has been communicated to them as it makes paying and tipping easier as part of a large party (especially when splitting the bill) and is clearly stated. Other people find it tacky and maybe mildly offensive to be told a gratuity has been added to their bill.

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    • Enter your name... says:

      If tipping were illegal, then employers would need to pay whatever it takes to hire the people they need to run their businesses. That’s what they’re paying now, too. Just because you *can* legally pay only $X doesn’t mean that everyone actually does this.

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      • gw says:

        “Just because you ‘can’ legally pay only $x doesn’t mean that everyone actually does this.”

        In the restaurant industry it does. I have never ever heard of anyone making more than their states minimum wage as a waiter (not including tips).

        If tips became illegal this would change as waiting tables is a demanding and somewhat skilled job so wages would have to attract and retain people who were competent. But currently this is not the case. Every restaurant I’ve ever heard of pays minimum.

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