Tips in the U.S.A.

My friend just got back from a trip to Rome and Croatia, and told the old story of how people don't tip in european restaurants and the service is bad. On the other hand, the food experiences were the highlight of the trip. This made me wonder, what does economics have to say about tipping? I see two areas where we see what looks like a single good split into two: wages and tabs. The wage is split into a restaurant-paid component and a customer-paid component while the bill is split into a tip component and a tab component. It's important to note that tip percentages have increased over the years.

With wages, we normally expect workers to follow the highest price, but they can't in a tip world where employers generally pay minimum wage. Because tips are a percentage of the tab, servers seek to work at restaurants with the highest menu prices. So we see the best service at the restaurants with the highest prices. Chances are, this is what we would see if servers were paid only with higher wages. The most expensive restaurants have the most expensive labor in the back of house, so they would pay the most for front of house workers if they had to. So far, I would expect more or less the same outcome for wages.

What about customers' paying for service separately from the rest of the meal? If europeans aren't willing to pay higher sticker prices at restaurants with better service, would american restaurants be able to incorporate service charges into their menus? You would think that people would not care if there is a 15 to 25 percent increase in menu prices if they were accompanied by a ban on tipping. If the service at one restaurant isn't up to par, customers go to another one. A few things could be going on here: people like to know that they are paying the server directly and don't think about the tip while ordering food and drinks. From my observations, most people stick to some percentage with only minor adjustments with respect to service. A generous tipper is always a generous tipper. A server who is twice as good as another doesn't get paid twice as much. Also, the social norm of tipping could be an opportunity to impress others. This would explain why tipping outpaces rising menu prices: people seem to derive some pleasure from being a generous tipper, even more so when they compare themselves to others. This brings us back to the tips-as-wages explanation above. As wages outpace inflation, we see more talent in the field since the attractiveness of holding server positions improves. Thus, take-home pay for servers increases faster than they would if managers paid their full wage. This is the explanation I ascribe to the difference between European and American restaurants. I don't really know why, but there is a clear pressure to increase tip percentages compared to others. This puts us in a bidding war for the best service, not the best food.

I'm sure there is a similar showoff effect with the restaurants themselves- people want to impress each other by going to nice restaurants, but that puts pressure on restaurants to improve everything outside of server quality (food quality, decor, etc.), resulting in higher menu prices. Because, again, tips are a percentage of the bill, any rise in menu prices increases the total amount of tips. Since the prevailing tip percentages have increased significantly over the years, we have increased our willingness to pay for good service, relative to the rest of the components of a dining experience. I don't see any reason to think we actually want more attentive service now than we wanted 15 years ago. This increase in price seems to reflect a gradual cultural shift stemming from a desire to one-up others, rather than a shift in preferences. That is to say, we have increased spending at restaurants over the years, but not in ways that we would prefer if we chose which items to pay for. So, in my view, we "buy" more service than we really want.