Why Does Tipping Still Exist? (Update)

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Speaker 1 Hey there, it's Stephen Dubner, and this is a bonus episode. It's an update of an episode we first published in 2019, and we're replaying it because the topic has been all over the news lately.

Speaker 1 The topic tipping. President Trump's One Big Beautiful Bill Act allows workers to deduct up to $25,000 of qualified tips from their federal tax returns.

Speaker 1 There are exceptions for some occupations and there's a phase-out for high earners. But what about tipping itself? What kind of economic activity is that exactly?

Speaker 1 That's the question we asked in this episode called why does tipping still exist?

Speaker 1 We have updated facts and figures when necessary. As always, thanks for listening.

Speaker 1 Time for a riddle. Name something that many people say they dislike and yet they do it all the time.
Something that many people consider a tax and others see as a form of altruism.

Speaker 1 Something that almost always happens in many circumstances and yet in many similar circumstances never happens.

Speaker 2 Everybody practically leaves a tip in a full-service restaurant. Nobody leaves a tip when they go to McDonald's.

Speaker 1 Today on Freakonomics Radio, we wade back into the tipping wars. We discuss the lessons learned when one gigantic company that didn't used to have tipping changed its mind.

Speaker 3 There's a lot of social pressure to give a tip in that situation.

Speaker 1 What happens when a famous restaurateur goes the opposite direction and gets rid of tipping?

Speaker 2 I think the biggest thing we've learned is that this is really tough.

Speaker 1 And why tipping, as controversial as it may be, isn't likely to go away.

Speaker 4 They're wrong when they say that, but they believe it.

Speaker 5 This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner.

Speaker 1 Let's begin with some history, courtesy of John List, an economist at the University of Chicago.

Speaker 3 Some people argue that tipping goes all the way back to the Roman era, and some argue that it was the 17th century in England. But either way, tipping ended up coming to the U.S.

Speaker 3 roughly in the 18th century, and there was actually a lot of resistance. So you had people like Mark Twain saying, we pay that tax knowing it to be unjust and an extortion.

Speaker 3 And you had the New York Times in 1897 writing that tipping was the vilest of imported vices. And even in 1915 in America, there were actually six states that abolished tipping.

Speaker 3 And they abolished it because they viewed it sort of like Twain did, as kind of a social pressure way to extort money.

Speaker 6 Tipping is one of the most interesting behaviors that we have, right?

Speaker 1 And that is Uri Genesee. He's an economist at the University of California, San Diego.

Speaker 6 I sometimes tip when I go to my coffee place in the morning. I always tip at a restaurant.
I never tip in McDonald's.

Speaker 6 So why is it that it's so different from me?

Speaker 1 So you can see why economists would find tipping to be a topic worthy of their inspection.

Speaker 6 It's really a very strange behavior and we seem to be acting according to some kind of norms.

Speaker 6 And these norms are very hard to follow.

Speaker 3 You know, the social norms around tipping in the United States, it's like no other that I've ever witnessed.

Speaker 1 It's estimated that tipping in America adds up to more than $50 billion a year. That is larger than the entire health and fitness industry.
It's double the annual budget for NASA.

Speaker 1 And $50 billion is a lot of money, especially when you consider that tipping is optional. But of course, in some cases, restaurants particularly, it's not really optional.

Speaker 1 If you try to not leave a tip of at least 15 or 20% in a full-service restaurant, you may well be told, quite directly, just how not optional tipping is.

Speaker 1 There are more than 2 million waiters and waitresses in the U.S. They are often paid below minimum wage, in which case the bulk of their pay comes from tips.
Most of us are accustomed to this.

Speaker 1 Others think it's strange that restaurants, rather than paying employees a set wage, as most industries do, instead pass along their labor costs to customers in the form of a quasi-voluntary tax.

Speaker 1 Yes, it is a way to keep menu prices low, but it's a weird custom, don't you think?

Speaker 1 And once you look more closely, you'll see there are a lot of weird things about tipping.

Speaker 1 Why, for instance, is it now customary for casual restaurants and coffee shops even to ask for tips on takeout orders? Or think about going to a nice hotel.

Speaker 1 A porter carries your suitcases to the room. It takes about two minutes, and that's his job.
And yet, we usually tip him, even though he doesn't ask.

Speaker 1 Now, think about the person who cleans your hotel room. There's often a little envelope in the room to leave a tip for the housekeeper.
Do you know how often that envelope is used?

Speaker 1 One study that was conducted in an upscale independent hotel showed that for every 100 nights spent there, tips were left on just five of those nights.

Speaker 1 And cleaning your room takes a lot longer than the two minutes to carry your bag. It also means dealing with the mess you left behind.
So why does the housekeeper not get a tip while the porter does?

Speaker 1 A couple possible answers. The housekeeper is usually a woman and the porter a man.
Probably more important, she's invisible. He's standing right there in front of you.
Still, it's weird.

Speaker 1 Here's another weird one. Why is it that you're always expected to tip a taxi driver, but when you use a car service app like Uber, you're not?

Speaker 1 Oh, hang on, that's how it used to be.

Speaker 1 But if you use Uber, you've noticed that now you are asked, after the trip, if you'd like to tip.

Speaker 1 Would you like to know one of the people who made that happen?

Speaker 3 My name is John List.

Speaker 1 Who, you'll remember, is?

Speaker 3 I'm a professor of economics at the University of Chicago.

Speaker 1 List is also chief economist at Walmart. Before that, he held the chief economist job at both Uber and Lyft.

Speaker 1 There's one more thing you need to know about John List and his friend Uri Genesi. They both love to run huge experiments out in the real world.
Economists didn't used to do this.

Speaker 1 If they ran any experiments at all, they were likely to be small lab experiments, the kind often run by psychologists.

Speaker 6 You can learn a lot from this, but it's limited.

Speaker 1 Limited in that your research subjects are likely to be a few dozen undergraduates making artificial choices in an artificial environment.

Speaker 1 Big field experiments, meanwhile, the new breed of economists sees this as a great way to gather meaningful data.

Speaker 1 Here are some of the questions that John List has tried to answer by running that kind of experiment.

Speaker 3 Why do people discriminate against one another? Why do women earn less pay than men in labor markets? How do we convince people to pay their taxes on time?

Speaker 1 And so it's not very surprising that John List, when he was working at Uber, would try to cook up an interesting experiment. And what's more interesting than tipping?

Speaker 3 Even though it does have kind of a spotty history,

Speaker 3 when you think about the potential economic incentives of tipping, it actually presents an interesting way to induce higher quality amongst your workers, your drivers, your contractors.

Speaker 1 In other words, a tip is an incentive for better service. That's always been the main argument for why we tip the servers in restaurants.
Here's Danny Meyer.

Speaker 2 I'm the founder of Union Square Hospitality Group.

Speaker 1 Meyer is one of the most successful and prolific restaurateurs in New York. In 2022, he stepped down as CEO of Union Square Hospitality, but he's still the executive chairman.

Speaker 1 He is also the man behind the global hamburger chain, Shake Shack.

Speaker 2 Correct. We created Shake Shack, but but it's now a public company, and I remain the chairman of the board.

Speaker 1 Meyer is a zealot for great customer service. He likes to say his business is hospitality as much as it's food.
But he does not like the idea of tipping as a means to induce hospitality.

Speaker 2 The theory has always been in the tipping system

Speaker 2 that the only way I could possibly get someone to be nice to me or to bring my food promptly is to create a scenario in which which they know that I will either punish them if they don't or reward them if they do.

Speaker 1 So that's another weird thing about tipping. There's also this uncomfortable fact.

Speaker 4 It's discriminatory.

Speaker 1 That's Michael Lynn. He is a social psychologist at Cornell and one of the world's preeminent scholars on tipping.

Speaker 4 Both groups, blacks and whites, will tip a white server more than a black server. And that's even controlling for perceptions of service quality.

Speaker 1 Lynn's research shows that tipping is an unfair way for workers to be paid because personal characteristics like a server's race, gender, and appearance factor too much into customers' tipping decisions.

Speaker 1 We interviewed Lynn several years ago for an episode called, Should Tipping Be Banned?

Speaker 4 You know, I think I would outlaw it. You can make the argument that tipping is a condition of employment that has an adverse impact on a protected class.

Speaker 4 And the Supreme Court has ruled that even neutral business practices that are not intended to discriminate, if they have the effect of adversely impacting a protected class, are illegal.

Speaker 1 So there's yet another reason to dislike tipping. You'd think, therefore, that the last thing you'd want to do is to introduce tipping into a business that seemed to be getting along fine without it.

Speaker 1 A business like Uber. As I am guessing you know, Uber was one of the most successful startups in history.
Today, their market capitalization is nearly $200 $200 billion.

Speaker 1 It's a massive company and a controversial one, too. Its founding CEO, Travis Kalanick, was forced to resign after a series of acts unbecoming a CEO.
Another Uber controversy?

Speaker 1 Its drivers, who are independent contractors and not employees, often don't make much money. So, John List, when he was chief economist at Uber, he saw an opportunity.

Speaker 3 Prior to 2017, you know, know, Uber did not have in-app tipping on the platform.

Speaker 3 You might have had some situations where people were giving cash tips, but it was something that did not go through the Uber platform.

Speaker 1 Actually, List saw two opportunities to give Uber drivers a chance to earn more money and to run a huge field experiment on tipping. There was one big obstacle, Travis Kalanik, the company's CEO.

Speaker 1 How did he feel about tipping?

Speaker 3 Travis had a pretty strong intuition that was a little bit like Mark Twain.

Speaker 3 He viewed it more as a tax or an increase in price because he felt that everyone would feel compelled to tip because it will become a social norm.

Speaker 1 We should know that Lyft, Uber's biggest rival, did allow drivers to be tipped to reward good service.

Speaker 3 You know, Travis was fine with rewarding great service, but he wasn't fine with social pressure leading to people transferring some money to another person.

Speaker 3 So really our first job was to assuage Travis.

Speaker 1 Assuage him that tipping on Uber would be truly optional and not a social pressurized default option.

Speaker 3 He made arguments that, look, if say 10 to 20% of people tip on the Uber app, then I'm going to consider that a win. So we went back to the drawing board and said, okay,

Speaker 3 what do we need to do? to make sure that tipping on the Uber app does not become the social norm and that we can get roughly 10 to 20 percent of people to tip.

Speaker 1 In other words, that was your target? You weren't going for 50, 100 percent?

Speaker 3 No, our goal originally was to make sure that this was not a price increase and loosely that meant 10 to 20 percent of the rides.

Speaker 1 And if it got much higher than that, it would just be a tax. Is that the idea?

Speaker 3 That's correct.

Speaker 1 And I'd like to know, especially because in many cases, workers receive tips because their employers don't pay them enough. And in some cases, employers have been known to take a cut of those tips.

Speaker 1 What share of the tip in this case, if any, goes to Uber itself, or does it all go to the driver?

Speaker 3 So, the entire tip goes directly to the driver, Uber or Lyft. Neither of them take a commission on the tip.

Speaker 1 So, John List, along with Uri Genesee and two more economists, Bharat Chunder and Ian Muir, turned the sprawling Uber ecosystem into a gigantic tipping experiment. What happened?

Speaker 1 We will find out after the break.

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Speaker 1 Before the break, we heard about an experiment where some economists introduced tipping to Uber's ride-sharing service.

Speaker 3 So in total, we have over 40 million observations of people.

Speaker 6 All ages, all ethnicities, all income levels almost, all over the country, not knowing that they are taking part in an experiment.

Speaker 3 And of those 40 million observations, we have roughly 800,000 drivers in our experiment.

Speaker 1 So how did John List, Oreganese, and their fellow researchers set up tipping on the Uber app?

Speaker 3 Remember, they were directed to not make it automatic okay we need to separate the act of tipping in space and time from the actual trip and that's important why if you take a taxicab trip the person turns around and you give them the fare and then 90 to 95 percent of people add a tip on it It's face-to-face.

Speaker 3 There's a social norm. There's a lot of social pressure to give a tip in that situation.

Speaker 1 So here's how Uber tipping was set up.

Speaker 1 The app generally wouldn't give a passenger the option to tip until they were out of the car and until the driver had given the passenger a rating, which the passenger doesn't see, by the way.

Speaker 1 So neither the rating nor the tip would be contingent on each other, which meant no quid pro quo.

Speaker 1 Especially because unlike a waiter or waitress in your favorite restaurant, the odds are you will never see that Uber driver again.

Speaker 3 The fact is, is that very few people meet twice.

Speaker 1 In the biggest cities where Uber operates, there is a less than 1% chance that the same driver and rider will ever be matched up twice.

Speaker 1 So, Uber tipping is presumably not about social pressure or reciprocity or extortion. Instead, it's supposed to represent true appreciation in monetary form of good service.

Speaker 1 So, how appreciative are Uber passengers?

Speaker 3 So, a first fact from our data is that roughly 15 to 16 percent of Uber rides are actually tipped.

Speaker 1 think about that for a second that's about one of every six rides that gets tipped versus about six of every six restaurant meals so not great news for uber drivers thinking they'd be raking in tip money but good news for john list and uber who remember were shooting for a 10 to 20 percent tipping rate now let's get into what list learned about the tippers There are three categories here.

Speaker 1 Passengers who always tip.

Speaker 3 Only 1% 1% of people tip on every trip.

Speaker 1 There are people who never tip.

Speaker 3 That's actually 60%

Speaker 3 of people.

Speaker 3 6-0%

Speaker 3 of people never tip once.

Speaker 1 So that leaves 39% who sometimes tip, yes? Exactly.

Speaker 3 You're talking about people who are tipping one out of eight times.

Speaker 1 Okay. So 1% of Uber passengers treat the ride like a restaurant meal, automatically adding a tip.
60%

Speaker 1 are

Speaker 1 no, thank you. I've already paid for the ride, so I'm not going to give you more of my money, which, if you're even a little bit anti-tipping in general, sounds pretty sensible.

Speaker 1 But then 39% of passengers tipped occasionally. Does that mean that Uber successfully made tipping about exceptional service?

Speaker 3 So one of the most surprising results is that when you look at the data pattern, it's actually the rider variables that are roughly three times more important

Speaker 3 than the driver variables.

Speaker 1 Let's translate what List said out of Economist Speak. What he means is that the biggest factor in whether a passenger tips is simply what kind of person the passenger is.

Speaker 1 That is a bigger determinant than the driver or the car itself or the route.

Speaker 3 So if I unpack that a little bit, the first thing you can think about is the star rating.

Speaker 1 Remember, just as Uber passengers can rate drivers, Uber drivers also rate passengers.

Speaker 3 The riders who have a five-star rating,

Speaker 3 they're more than twice as likely to tip than riders who have a 4.75 rating.

Speaker 1 And what kind of passenger has five stars?

Speaker 3 You know, they're punctual or they're nice in the car. They're giving respect to the driver.

Speaker 1 Okay, and these five-star passengers happen to be the same people who are most most likely to tip every time. In other words, they are just wonderful people,

Speaker 1 but there aren't that many of them. Just 1% of Uber riders.
So, who are these generous souls? What kind of person is most likely to tip an Uber driver? For starters, they are most likely to be male.

Speaker 3 A man is about 19% more likely to tip. than a female rider.

Speaker 1 That's an interesting finding, especially because it is the opposite of what John List's own research shows about charitable giving.

Speaker 3 Women consistently across the entire distribution give more money to charities than men do.

Speaker 1 And why is Uber tipping so different?

Speaker 3 My intuition is it's because this is anonymous. The world of charitable giving tends to have a lot of social pressure.

Speaker 3 And what the literature also has taught us is that women are much more likely to change their behavior in the face of social cues.

Speaker 3 My intuition would be if you looked at tipping to taxicab drivers or restaurants, that the difference would not be as stark and women might even tip a little bit more conditional on having the same income levels as men in those cases.

Speaker 1 Now, to what degree, if any, are you able to control for income of the riders in your study? It may be that the men are wealthier, yes.

Speaker 3 What we do find is that riders from lower income areas tend to tip less than riders from higher income areas.

Speaker 3 But even after we correct or adjust for those income area differences, we still find that men do tip more than women.

Speaker 1 You also write that tips tend to be hired during very early morning hours between 3 a.m. and 5 a.m.
and that these hours have a disproportionate percentage of airport and business trips.

Speaker 1 What it calls to mind to me is

Speaker 1 those trips may be being expensed and may not be coming out of pocket, and maybe people are more generous with tipping if it's not their own money.

Speaker 3 I think you're exactly right. I think those can be expensed.
What you also find though is that tips tend to be high on Friday and Saturday evenings. So this is the going out to eat and party crowd.

Speaker 1 This may or may not mean that the consumption of alcohol makes people more generous. The Uber data cannot answer that question.
So draw your own conclusions.

Speaker 1 But there is one huge huge conclusion the Uber data seems to point to. Most people, when given the option to tip, do not tip.

Speaker 1 And when they do, it doesn't have much to do with the quality of their experience.

Speaker 3 The bulk of the reasons why a driver will get tipped is because of these things that are outside of their control. But that said,

Speaker 3 there are many things that the driver can control that do impact the tip.

Speaker 1 For example.

Speaker 3 For example, if you look at drivers with a five-star rating, they're tip close to 50% more often than those with a 4.75 rating. So the quality of the driver matters.

Speaker 1 It matters, but again, not very much compared to whether a given passenger happens to be a tipper. or a non-tipper.
Similarly, there are other trip characteristics that may affect tips.

Speaker 1 How the driver drives, for instance, which Uber can measure via telematics information from the driver's phone.

Speaker 3 Hard accelerations matter. And if you have more of those, you receive less in tips.
Hard braking matters. If you have more episodes of hard braking, you receive fewer tips.

Speaker 1 The age of the car also matters a little bit.

Speaker 3 Drivers in the old cars are tipped slightly less than drivers in the new cars.

Speaker 1 And the language the driver speaks, which list measured by seeing whether drivers keep the language on the Uber app in the default setting, which is English, or they change it.

Speaker 3 And what we find is that those drivers who change the default language, those drivers end up getting tipped much less as well.

Speaker 1 One way to increase your tips as an Uber driver is to be female.

Speaker 3 What we find is a really strong result that female drivers receive about 12% more than male drivers in tips. Now, what's interesting though is that both female and male riders tip female drivers more.

Speaker 1 Earlier research of yours at Uber found a gender pay gap with men earning more, even though the algorithm is gender blind. I'm curious whether tipping substantially shrinks that gap.

Speaker 3 When you include tipping,

Speaker 3 That difference reduces by about 13%.

Speaker 3 So you still have a pretty large effect. Now, the reason why it doesn't lessen by more than that is that tips are only about 4% of fares.

Speaker 1 Okay, so cumulative tipping on the Uber app is only about 4% of the fare total.

Speaker 1 Yes, that's a lot less than the standard 15 or 20% tip in restaurants, but still 4% of extra money on millions and millions of Uber rides, surely that's got to be good news for the average Uber driver, doesn't it?

Speaker 3 Driver earnings actually do not increase on average because of tipping wait a minute how can that be what happens is when you add tipping to the app more drivers come online and they supply more hours so that shifts out the labor supply curve and just that shift alone of course decreases wages but then you have tips added on to that that make wages roughly the same as what they were before john list and his fellow researchers did find one lever they could press to increase the net amount of tipping, changing the default setting of the suggested tip amount.

Speaker 3 One trip might get a default of, would you like to tip $1, $3, or $5?

Speaker 3 Another rider, meanwhile, they might receive a preset of, do you want to tip $2, $3, and $5?

Speaker 3 And those defaults or presets matter a lot. Roughly 16.5% of trips are tipped when you have a low preset versus about 14.5% when you have a higher preset.

Speaker 1 What's the median amount tipped, however, in the different options?

Speaker 3 When you have higher presets, people tip less often, but they end up tipping more in the end. So if you want to increase tipping, what you want is a higher preset within reason.

Speaker 1 After the break, as you heard earlier, the restaurateur Danny Meyer thinks restaurant tipping is a bad idea, so he got rid of it. We'll hear how that's going.

Speaker 1 And does the tipping scholar who wanted to ban tipping still feel the same way? That's right after this.

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Speaker 1 Danny Meyer grew up in St. Louis, and even though he's been in New York forever, he still exudes a Midwestern sense of hospitality.

Speaker 1 So, while many of his restaurants, like Gramercy Tavern and Union Square Cafe and The Modern, are well-regarded high-end restaurants, the style of service is, like Meyer himself, Midwestern warm.

Speaker 1 This combination of warm service and good food translates into big tips. for the wait staff.
You might think that Meyer, as the employer of the people getting these big tips, might like this,

Speaker 1 but you'd be wrong.

Speaker 2 I decided to take on the tipping system back in 2015, and here we are in 2019, and we've learned a lot.

Speaker 1 That's right. Meyer started to eliminate tipping at his restaurants a few years ago.

Speaker 1 His menus would say hospitality included, which meant that prices were higher, but you'd no longer have to add a tip. to help pay the server's salary.

Speaker 2 We never wanted to hire people who would only be nice to you in expectation of a higher reward.

Speaker 1 We made an episode about it back then. It's called The No Tipping Point, if you want to check it out.
As we mentioned earlier, Meyer's restaurant empire also includes Shake Shack.

Speaker 2 I will credit Shake Shack with having inspired me to take this step in our full service restaurants. There are no tip jars at Shake Shack and there's no opportunity to tip at Shake Shack.

Speaker 2 If we can make the economics work where we're selling, you know, a

Speaker 2 six, seven dollar burger. Why in the world can we not make this work when we're serving you a hundred dollar dinner at Gramercy Tavern? It just doesn't make sense to me.

Speaker 1 The haphazard sense of tipping also doesn't make sense to Meyer.

Speaker 2 Everybody practically leaves a tip in a full-service restaurant. Nobody leaves a tip when they go to McDonald's.
Some people leave a tip in Uber.

Speaker 2 Almost everybody leaves a tip with a taxi driver. And so I think that whole social norm thing is very, very confusing to people.

Speaker 2 And I'm just happy to opt on the side of saying, you know that price we put on the menu? That covers everything.

Speaker 1 But Meyer wasn't only thinking about his customers. One of the biggest challenges of running a restaurant is retaining good employees.

Speaker 1 It's a business with a lot of turnover and turnover is bad for a business. One obvious way to keep your employees is to pay them well.

Speaker 1 The wait staff and bartenders at Meyer's restaurants were getting paid well, thanks to all that tipping, but the same couldn't be said for all the people who actually prepare and cook the food and wash the dishes and keep the place running.

Speaker 1 Meyer found that the tipped employees at his restaurants were earning about two and a half times what the back-of-the-house employees made. Were they really doing two and a half times the work?

Speaker 1 And the pay gap between tipped and non-tipped kept growing.

Speaker 2 Every time menu prices go up and they've only gone up over the course of my career, the tipped employee is making more because the tip is just a multiplier of the menu price.

Speaker 1 This pay gap had a variety of effects. One was that the people who spent time and money training to be chefs didn't want to work as chefs.

Speaker 2 We were seeing more graduates from the Culinary Institute of America, Johnson and Wales, the Institute for Culinary Education, applying for dining room positions than I had seen in my entire career because they realized they couldn't afford to live in New York and pursue the thing that had always been their dream.

Speaker 1 The pay gap between cooks and servers also created ill will and led to high turnover in the kitchen.

Speaker 2 I increasingly saw this divide growing and growing and growing between the compensation possibilities between tipped employees and employees that did not legally qualify to make tips.

Speaker 1 What does Meyer mean when he says that kitchen workers don't legally qualify to make tips?

Speaker 1 Because you'd think one easy solution to this problem would be to simply pool the tip money and redistribute some of it to the kitchen workers. But you can't do that.

Speaker 1 One quirk of the hospitality industry is that restaurants are allowed to pay servers what's called a tipped wage, which is below the minimum wage, as long as tips make up the difference.

Speaker 1 This caveat is called the tip credit, and restaurants use it to lower their labor costs.

Speaker 1 But one restriction of the tip credit is that it applies only to employees who spend at least 80% of their time in a customer-facing role.

Speaker 1 So a restaurant can pool their tips and distribute them among the wait staff, bartenders, and hostesses, but not the kitchen crew.

Speaker 2 I might think twice if I believed that the legislature was going to create a new law that permitted tips to be shared everywhere. That has not happened.

Speaker 2 But even if they did do that, it would still lead me to say this is not a professional way to treat people.

Speaker 2 Tipping and of itself, I don't think, fosters the professionalism that we're looking for in our industry. If you think about every industry where tipping happens, it's often not a full-time career.

Speaker 2 I don't tip my airline pilot or my lawyer or my teacher or the person who's interviewing me on their podcast. That's a profession.

Speaker 1 Podcasting, a profession? Anyway, for all these reasons, Danny Meyer decided to eliminate tipping at all his restaurants.

Speaker 2 We've converted about one every four to six months. We just have one more to go.

Speaker 1 Okay, so let's talk about what you've learned.

Speaker 2 Well, I think the biggest thing we've learned is that this is really tough. And it's tough because it's really a three-legged stool that we're trying to balance.

Speaker 2 How do you create a menu price that doesn't frighten away a prospective customer who's just casually looking up your restaurant online?

Speaker 2 and may not understand that there will be no tipping on top of that. And then, did you actually compensate your team to the degree that you hope to?

Speaker 2 And now, the third leg of the stool is, did you actually make enough money to cover all of the costs involved?

Speaker 1 What can you tell us about your restaurant revenues before and after, hospitality included?

Speaker 2 Well, I can tell you that our revenues are decidedly higher, but keep in mind, we started charging 21% more roughly on all of our prices.

Speaker 2 So, if they were not at least 21% higher, that would be a big fail.

Speaker 2 What I can also tell you is that the compensation for our staff members, both formerly tipped employees and never-tipped employees, has also gone up quite a bit.

Speaker 1 So, if one of the goals was to even out the pay between the people cooking the food and the people serving the food, how much have you closed that gap?

Speaker 2 Here's what I know, Stephen.

Speaker 2 The earning potential before we started, Hospitality Included, was 2.4 times more for tipped tipped employees than for back-of-the-house employees. Today, it's 1.9 times more.
So that's big.

Speaker 2 I can also say that the line cook wages, so the people who cook your food, have gone up 37 percent. Front-of-house compensation, formerly tipped employees, has gone up 8%.

Speaker 2 So we've been able to increase both, but we've obviously, in order to make some headway in terms of this discrepancy, have increased back-of-the-house pay by a lot more.

Speaker 1 Right. And what's that mean in actual dollar terms for kitchen versus wait staff? Maybe you could use the modern as your example.

Speaker 2 When we started, hospitality included, in the aggregate, the front-of-the-house employees at the modern were making somewhere around $22 an hour. And today that number is about $25 an hour.

Speaker 2 Believe it or not, a cook in the aggregate in 2015 was making just over $11 an hour. Today, they're in $16.5 an hour.
So that's a serious, serious hike.

Speaker 1 Meyer didn't share with us any profitability figures. So we don't know the degree to which these higher wages are eating into the restaurant's bottom lines.

Speaker 1 But at least in terms of wages, the hospitality included model sounds like it's working. Kitchen wages went up a lot.
Even wait staff wages went up a little, on average.

Speaker 1 But not everybody likes to be average.

Speaker 2 Whenever we've converted a restaurant, we would experience as much as a 30 to 40 percent turnover in our legacy staff.

Speaker 2 And I completely understand why that is, because the way that you got a raise in a tipped house was to have stayed at the restaurant longer than anyone else, which meant that you got the lucrative Thursday, Friday, Saturday night shifts.

Speaker 2 You know, and it may have taken you six or seven or eight years to earn that schedule.

Speaker 1 But the new no-tipping model made those shifts relatively less valuable, which for shorter tenured workers was a positive.

Speaker 2 One of the real benefits is that you can make as much money working on a Monday night as on a Friday night because the way we compensate our team is a higher hourly rate plus a revenue share model that averages out the entire week.

Speaker 1 And there was another benefit.

Speaker 2 I feel great about the fact that I no longer need to worry that the only way to get a great tip is to have a woman subjecting herself to leering men.

Speaker 2 Or if I'm from a different ethnic group than the table that I'm serving, that I need to worry that they're not going to give me a good tip.

Speaker 1 But if you think you hear a hint of disappointment in Meyer's voice, Well, I'm not sure that's what we're hearing, but when he set out to eliminate tipping, he thought he was starting a revolution.

Speaker 2 Yeah, well, we did not succeed at inspiring an entire industry to change its tune.

Speaker 1 The no-tipping initiative got a ton of media coverage. It was easy to think that a lot of restaurants were following suit.

Speaker 4 Not as many restaurants have moved away from tipping as you would get the impression.

Speaker 1 That, again, is Michael Lynn, the Cornell tipping scholar.

Speaker 4 In the 70s and 80s, there was a comparable tendency for a couple of restaurateurs that got a lot of press for it to eliminate tipping.

Speaker 4 And some of them survived and continued that policy, but the vast majority ended going back to tipping.

Speaker 1 Danny Meyer gets that.

Speaker 2 I've been pretty zealous about how I think tipping actually holds people back, but I also understand that movements happen

Speaker 2 in a big way when the economics work for everybody. And I don't think we're quite there yet.
I completely understand it's not working yet for everybody.

Speaker 1 Aaron Powell, if you were just having the idea today, having gone through what you've gone through the first few years of trying it, would you try it again?

Speaker 1 Or would you consider this an experiment in progress that while noble and smart, et cetera, et cetera, is maybe too difficult, that there's too much status quo to overturn?

Speaker 2 Well, I think that's a fair question. And the honest answer is I'm not sure.

Speaker 2 I think largely because of some of the notoriety of our making this initiative, that has actually brought an awareness to the legislature, which is getting very, very close, as I understand, to creating a situation where tips can be shared amongst everybody.

Speaker 1 We conducted this interview in 2019, and New York state law has not changed since then.

Speaker 1 But even if it does, and if back-of-house workers were to get a share of tips, it probably wouldn't eliminate tipping, might even strengthen the status quo.

Speaker 1 But Danny Meyer sees another development that might force a big change.

Speaker 2 Each time minimum wage goes up, restaurants that are continuing to have a tipping system have all raised their prices to keep up with the minimum wage increases.

Speaker 2 And then the guest is tipping 20% on top of that. So we're about one minimum wage hike away from a pricing advantage over other restaurants while we're paying our staff more.

Speaker 2 And I think that's the point when you're going to start to see many, many restaurants eliminate tipping.

Speaker 1 A few months after my conversation with Danny Meyer, the pandemic shut down the entire restaurant industry.

Speaker 1 When Meyer's restaurants reopened in July of 2020, the no-tipping policy was no longer in effect. We don't know how often people will be eating out, Meyer told the New York Times.

Speaker 1 We do know that guests want to tip generously right now. Michael Lynn at Cornell, who once told us he would like to ban tipping, he is not so sure we will ever see the end.
Why?

Speaker 4 Look, when I started doing research on tipping, I thought tips would be strongly related to service quality.

Speaker 4 But what I found was that about 4% of the variance in tips left by different groups can be explained by their ratings of service quality.

Speaker 1 That is, in restaurants, as in the tipping of Uber drivers, there was a weak correlation between quality of service and tip.

Speaker 1 But Lynn discovered something interesting in his research. A lot of restaurant servers think there's a strong correlation.

Speaker 4 About half of the servers in this country will say that they think their tips are moderately to strongly affected by the service they leave. They're wrong when they say that,

Speaker 1 but they believe it.

Speaker 4 And because they believe it, tipping in fact does provide an incentive to deliver better service for at least half of the servers in this country.

Speaker 4 So, yes, my opinion about the incentive value of tipping as a system of compensation has changed over time, although the facts haven't changed.

Speaker 4 I just learned more about it and began to think a little bit more sophisticated about it.

Speaker 1 Okay. Did you follow that? Waiters and waitresses think their service significantly affects their tip, even though the data shows it doesn't.

Speaker 1 But because waiters and waitresses think it does, they act as if it does.

Speaker 1 And Michael Lynn found a similar dynamic from the customer side.

Speaker 4 Tipping increases customer satisfaction. Customers expect service to be better under a tipping system, and that can bias their perceptions.

Speaker 4 I've done a couple of studies based upon recent restaurants that have eliminated tipping. So for example, Joe's Crab Chat recently at several of its restaurants eliminated tipping.

Speaker 4 Most of them went back to tipping. Their online service ratings declined during the period that they had no tipping and went back up when they reinstituted tipping.

Speaker 1 Does that mean the service actually got worse when there was no tipping?

Speaker 4 I don't know. I can't nail down precisely why it occurred.
I believe it has to do with customers expect service to be better. I know that customers generally like lower prices.

Speaker 4 And Joe's Crab Chack, when it eliminated tipping, it raised its prices.

Speaker 1 This suggests that many restaurant customers are price sensitive and that they're so accustomed to seeing menus carrying a pre-tip price that they'd prefer to see the low price and then tip even though they'll end up paying the same or even more.

Speaker 1 The human mind is a funny thing, is it not?

Speaker 4 I'm less likely to want to just ban tipping now because the data I have suggests that customers are happier with tipping.

Speaker 4 The press mostly focuses on this from the standpoint of servers, but by far the largest group that's impacted by tipping is customers.

Speaker 4 As much as people might grouse about tipping, overall, it seems to increase consumer satisfaction. And since they outnumber employees by a wide margin, likely it's in society's benefit.

Speaker 1 So Michael Lynn's research suggests that Danny Meyer's no-tipping revolution will have to wait even longer. But Lin's research did identify one category of restaurant that's ready for the transition.

Speaker 4 And that is really upscale restaurants that replace tipping with higher menu prices.

Speaker 1 Any examples?

Speaker 4 Danny Meyer's restaurants fall in that category.

Speaker 4 I think that the price sensitivity of his customers is lower. I also think that

Speaker 4 he's got a strong enough reputation that people won't anticipate lower service quality. It's a Danny Myers restaurant.
People will still expect good service, even if there is no tipping.

Speaker 1 So what have we learned other than the fact that tipping is among the most unpredictable economic activities on earth?

Speaker 1 I went back to John List to ask whether his research on uber tipping says anything larger about the human condition.

Speaker 3 I think a first point that the data really highlight is that very few people will be

Speaker 3 continuously generous and consistently generous. I think that that just jumps out in the data.
I think a broader point number two is a heterogeneity across people.

Speaker 3 You know, we oftentimes have people talking about, you know, well, everyone's different, but we actually have a really good glimpse of an important part of our economy and it shows you just how important things like if you're a nice person and you get a nice rating that that spills over to this generosity that you can exhibit privately.

Speaker 3 I think that's sort of interesting because in psychology and in economics we found that a lot of behaviors don't spill over to different areas in our lives.

Speaker 3 So, you know, you smoke, but then you wear a seatbelt. You're nice in one setting, but you're mean in the other.

Speaker 3 This sort of gives you a glimpse that there's some consistency in this generosity or being nice to another person that is much stronger than what I've seen in the past.

Speaker 1 John, what kind of a tipper are you?

Speaker 3 I'm an always tipper. I'm the 1%.

Speaker 1 And why is that? Is it that you want to give some of your money to those people, or is it that you want to be for yourself the kind of person who does that?

Speaker 3 I think it's both. I think that this is an important time to send wealth or income to another person who's doing a job such as this, but I also feel good about doing it.

Speaker 3 I have a warm glow, and it makes me feel good inside that I'm not stiffing the person.

Speaker 1 If John List is telling the truth, and I have no reason to think he's not, this is interesting that an economist of all people always tips.

Speaker 1 Economists famous for knowing, as it's said, the price of everything and the value of nothing.

Speaker 1 Economists who lecture the rest of us about utility and profit maximizing, about putting aside our pesky emotions when it's time to make a decision. I have a warm glow.
A warm glow?

Speaker 1 The fact that an economist like John List always tips is, I believe, the best possible evidence of just how weird tipping truly is.

Speaker 1 Thanks to John, as well as Uri Genesee, Danny Meyer, and Michael Lynn. We will be back very soon with a new episode.
Until then, take care of yourself. And if you can, someone else too.

Speaker 1 Freeconomics Radio is produced by Stitcher and Renbud Radio. This episode was produced by Matt Hickey and updated by Dalvin Abuaji.
It was mixed by Jasmine Klinger.

Speaker 1 The Free Conomics Radio Network staff also includes Alina Coleman, Augusta Chapman, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Greg Rippin, Jeremy Johnston, Morgan Levy, Sarah Lilly, Teo Jacobs, and Zach Lipinski.

Speaker 1 You can find our entire archive on any podcast app or at freeconomics.com, where we publish transcripts and show notes. Our theme song is Mr.

Speaker 1 Fortune by the Hitchhikers, and our composer is Luis Guerra. As always, thank you for listening.

Speaker 1 So the stereotype really, the correct stereotype holds true, which is that big city people are mean, not that big city people are like sophisticated and big tippers.

Speaker 3 Except for you, Stephen, you're a big city person who's extremely nice.

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