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

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.

► Millions of tipped workers are subject to the “tipped minimum wage.” ► A model that examines the implications of the tipped minimum wage is developed. ► Increasing it may lead restaurants to use a service charge instead of tipping. ► Because servers are better off with tipping, they will be hurt from such a change. ► Increasing the tipped minimum wage may reduce social welfare.