It is safe to say that the payment of gratuities (“tips”) to service industry workers has been a major source of economic activity in the United States since at least the 1930s. It is currently estimated that there are approximately $40 billion in tips paid annually within the restaurant industry alone. Within “traditional tipped industries” (nail salons, casinos, taxi cabs, barbers, hairstylists, valets, etc.) tips can make up well over one-half of the hourly minimum wage workers in these traditional tipped industries derive from their work. However, in the emerging on-demand app-based service sector – ride share, grocery delivery and food delivery – the occurrence of tipping can be more sporadic and less than robust than what occurs in traditional tipped industries. For example, it is estimated that tips derived by app-based ride share drivers on average add only about $1.00 to the hourly wage received by such drivers from their work.
The beliefs that most individuals in the U.S. have about tipping are by and large based on folklore and the prevailing view that people tip because of an adherence to a social norm that has been ingrained in the fabric of U.S. society by years of practice. It would be accurate to say that most individuals do not consciously know why they tip, they just know that in certain situations they are supposed to tip and that the failure to tip in those situations is likely to subject one to ridicule, embarrassment and low esteem.
When one critically thinks about the practice of tipping, there appears to be no rational reason to tip. In most situation, tipping takes place after a service has been provided, and therefore appears to be totally at odds with the basic logic of rational cost-benefit exchange in economics. An individual seeking to maximize his or her own self-interest, who is unconcerned with ridicule or embarrassment, has a strong incentive to not tip without any particular harm. The incentive to “duck out” of a tip is particularly heightened in the on-demand app-based service sector where online platforms facilitate the delivery of services without the occurrence of any form of pre-existing relationship between service worker and customer, where the nature of the app-based platform and the nature of delivered service do not promote the development of a relationship between service worker and customer, and where the very nature and objective of the app-based labor platform is almost singularly transactional – non-relational – oriented.
The common explanation for the differential between tipping behavior within traditional tipped industries versus tipping behavior in the app-based services sector is that for some reason the custom or etiquette of tipping established within traditional tipped industries has simply not comprehensively carried over into the app-based services sector. This explanation is then typically followed with the assertion that getting tipping behavior in the app-based services sector to more closely match the habits manifested in the traditional tipped industries lies in efforts to educate or remind consumers that the tipping etiquette they are so accustomed to when receiving services within traditional tipped industries also applies when services are being commissioned within the app-based services sector.
In the modern U.S. service economy, gratuities for most lower-skilled, lower-wage service workers have been firmly transformed from a “wished-for” social nicety from a customer to a needed and necessary component of worker wages. U.S. economic trends clearly indicate that the population of lower-skilled, lower-wage service workers is rapidly increasing in the U.S., and that more individuals are likely to be dependent upon tip payments as a meaningful contributor toward the attainment of a living wage. Given this fact, it is unquestionably time to reimagine what gratuity payments really are in today’s modern economy, how they are paid, and whether tip transactions occurring within the present-day service sector – especially the app-based service sectors – can be innovated to come in line with today’s realities that for many service workers the pursuit and receipt of tips is a necessary business endeavor.
THE EXPANDING U.S. SERVICE INDUSTRY
In today’s industrialized U.S. economy, the service economy has overwhelmingly become the engine for economic growth and prosperity. In fact, in the U.S., the area of our economy where the primary economic activity is the provision of services rather than the production of goods constituted 68% of U.S. GDP in 2018. Moreover, increasing technological advances within the U.S. continue to fuel the drive in the importance and growth of the U.S. service economy as more and more individuals are able to gain near frictionless entry into various service industries due to the creation of digital on-demand labor platforms.
The U.S. labor market for services has always at some level been divided between higher-skilled services provided by doctors, lawyers or financial planners, and lower-skilled services provided by restaurant wait staff, taxi drivers or housekeepers. Since the early 1980s, this division has become more conspicuous with expanding job opportunities in both higher-skill, relatively high-pay occupations, and lower-skill, lower-pay jobs, as opportunities in middle-skill, middle-wage jobs have been in steady decline. Not only has the U.S. labor market for services been progressively impacted by the increased polarization between high-skilled services and low-skilled services, but it has been increasingly disrupted by the advent of the contingent workforce, a labor pool of freelancers, independent contractors and app-based labor platform workers that are hired by organizations and individuals on an on-demand basis. Nowhere has the rise of the contingent workforce been more impactful on the economics of work in the U.S. than in the lower-skilled services labor market where it is typical for service workers to routinely work uneven hours, receive poor pay, and receive no customary employment-type benefits.
Up until the start of the 21st century, most lower-skilled service jobs provided workers with a meaningful base wage which, when combined with the often-received gratuity payment from a customer, provided the worker with enough income to constitute a living wage. However, in early 2000 some key events occurred which made the base wages received by lower-skilled service workers progressively incapable of contributing to a worker’s living wage in an essential way.
Beginning in June 2009, the U.S. started its longest economic expansion in its history, only to come to an end in March 2020 with the arrival of COVID-19. While no one would argue that in general, economic expansion is a good thing, the latest U.S. economic expansion saw its benefits unevenly distributed more toward higher-skilled service workers and less for lower- skilled service workers. At the same time, the recent economic expansion brought with it rates of inflation that caused the base wages of lower-skilled workers to effectively fall to levels incapable of creating a strong base for an individual living wage.
Even as the economic expansion was occurring in the U.S., the federal government and many state legislatures were unwilling to raise the legally mandated standard minimum wage. The federal standard minimum wage has been at $7.25 an hour since 2009, the very beginning of the most recent U.S. economic expansion. Only 29 states in the U.S. have legally mandated standard minimum wages higher than the federal standard minimum wage, and of those 29 states, only 14 of them have a standard minimum wage higher than $10.50 per hour, which is considered by many wage and labor observers in the U.S. to be the minimum hourly wage necessary for an individual in the U.S. to be able to achieve a living wage.
The insufficiency of most legally mandated minimum wages to be meaningful base contributors to the average lower-skilled service worker’s living wage is even more stark in those sectors of the U.S. economy where the “tipped minimum wage” is used to pay service workers. The tipped minimum wage is a separate and distinct minimum wage established by the federal government and most state governments which is lower than the standard minimum wage and is used as a pay structure for workers that presumably receive substantial portions of their work compensation from customer gratuities. The rationale for the tipped minimum wage is that because certain workers receive tips in the course of their work, employers of those workers do not have to be required to pay as much legally mandated minimum wage to the worker as long as what the employer pays the worker, when combined with the tips received by the worker, meet or exceed the standard minimum wage.
In theory, reasons for the tipped minimum wage seem plausible. In reality, it is a disaster for most lower-skilled service workers. Consider this, since 1991, the federal tipped minimum wage has been $2.13 per hour. In 17 states, the tipped minimum wage is exactly the same as the federal minimum tipped wage. In 36 states (which includes the District of Columbia), the tipped minimum wage is less than $5.00 an hour, and only nine states have a tipped minimum wage above $8.50 an hour. In addition, because of overall poor regulatory oversight and enforcement of the minimum wage laws, “wage theft” – the confiscation of tips or the failure to make up the difference when a worker’s tips are not adequate enough to get him or her to minimum wage levels – is a common occurrence.
Suffice it to say that the wage landscape for lower-skilled service workers in the U.S. would not be of such great concern if the U.S. economy was poised to provide such workers with a fluid pathway and inevitable rise up and away from lower-wage service jobs, thereby insuring that this particular group of U.S. workers would constitute a relatively smaller portion of the overall U.S. workforce. However, the opposite is true. As of the date of this writing, COVID-19 has pushed the unemployment rate in the U.S. up to an estimated 15%. Many labor experts have observed that only 60% of those workers sidelined by COVID-19 will become re-employed, and many of those workers will move down, not up, the pay scale. As the U.S. economy begins to move past the economic impact of COVID-19, it is expected that lower-skilled service jobs will be among the fastest-growing occupations in America.
What all of this really means for the average lower-skilled service worker is that tips are no longer simply an optional social frill to be “hoped-for” from customers. Instead, they are now, in reality, necessary wages that most service workers must receive on a regular and meaningful basis in order to achieve a living wage. In the 21st century, the pursuit of customer gratuities is now a business for service workers if they want to achieve a living wage from their work. The modern role that gratuities play in a service worker’s earnings necessarily means that a paradigm shift on how tipping is viewed, encouraged, and transacted in the U.S. service economy must take place in order for the wage needs of today’s service worker are met. It is time to innovate the business of gratuities.
HOW TIPPING BECAME PART OF THE AMERICAN ECONOMIC LANDSCAPE
Tipping is more than a well-established social convention. As already noted, it is a multi-billion-dollar market that is responsible for providing an income to millions of workers in the U.S.
There are a countless number of stories and folklore regarding the origins of tipping in the U.S. By all accounts, the practice originated in the taverns of 17th century England as a way for patrons to secure the attention of tavern service workers. The practice was brought to the United States in the 1850s by wealthy Americans who vacationed in Europe, witnessed the custom in Europe and then brought it back to the U.S. as a way of showing off their status and class. However, the practice was met with widespread scorn by most Americans as they viewed the practice of tipping as being against the American spirit and the promotion of a service class being dependent on a higher class.
Throughout the late 1800s through the early 1900s various attempts were made in the U.S. to eliminate tipping. During this period lobbying groups and state legislatures pursued anti-tipping laws in states such as Washington, Mississippi, Arkansas, South Carolina and Tennessee. However, in 1919 the Iowa Supreme Court in the case of Dunahoo v. Huber ruled that state anti-tipping laws were unconstitutional, and since that time no further serious efforts in the United States have been made to outlaw tipping.
WHY WE TIP TODAY
Why we tip today is actually fairly complicated. Academics that have spent significant amounts of time studying the practice of tipping tell us that this complication is driven by the fact that people tip for a variety of different neoclassical economic, social, and psychological reasons. Because these various and unconnected reasons may or may not be motivating a customer at any given time when a service worker engages with a customer, a service worker’s prospect of securing a tip through a particular engagement with a customer is akin to a spin of a roulette wheel.
Neoclassical economic reasons for tipping are centered around the notion that customers tip in order to influence a service worker to provide the customer with a higher and more customized level of service than may be rendered to non-tippers. From a neoclassical economic standpoint, some customers tip because they are driven to obtain a greater gain from their interaction with a service worker than may be available to a non-tipper. For example, at the core of the app-based services industry, every rideshare customer wants to be driven somewhere, every app-based grocery delivery customer wants to have his or her groceries obtained and delivered to them, and every app-based food delivery customer wants food from a location delivered to them. And the app-based companies arrange for that to occur. But when it comes to service, different customers may very well prefer different types of service and, through tipping, set the price they are willing to pay for the service accordingly. Some customers may want their groceries delivered immediately while others may not care if their groceries are not delivered until the next day.
When the conditions of the interaction between the service worker and customer are such that the customer is able to communicate to the worker ahead of time of his desire to have special service, and that he is willing to compensate the worker for the special service through a tip, and the worker is able to perceive and rely upon the customer communication, the neoclassical economic reason for tipping is a win-win for both the service worker and the customer. The service worker obtains enhanced gain by allocating his or her service time for maximum compensation, and the customer obtains enhanced gain by obtaining the service that he or she desired for a price he or she was always willing to pay. However, where the conditions of the exchange between the service worker and the customer are faulty, the neoclassical economic reasons for tipping become problematic as certain customers become willing and capable of engaging in manipulative activities in order to obtain maximum gain from their interactions with a service worker without sharing any of those gains with the service worker. A classic example of this are the setups of some app-based labor platforms that allow for “tip-baiting” (the practice of dangling a big tip to a service worker only to ultimately not tip the worker after a service has been provided).
The neoclassical economic reasons for tipping are rooted in the belief that individuals do so in order to gain something for themselves within the interaction with a service worker. But there is evidence that individuals also tip for non-economic reasons such as social and psychological reasons.
Individuals are sometimes motivated to tip because they actually want to help service workers. Indeed there is anecdotal evidence of the existence of this motivating factor being present in the app-based labor space. In February 2019 customers of DoorDash essentially caused the company to change its in-app tipping protocols when customers raised up and voiced concern that the tips they were paying to service workers through the DoorDash in-app tipping function were not being remitted to DoorDash service workers. In essence, they were concerned that their efforts to help their service workers were being stifled by DoorDash.
U.S. consumers regularly report that the desire to reward good service also drives their tipping behavior. The motivation to reward service has been found by economists, psychologies and sociologist alike to be consistent with “reciprocity and equity theory” which advances the belief that people generally feel obligated to repay the favors others do for them, and that people sometimes can feel distress when the benefits they get and give in their relationships with others are not proportional to one another. In service worker-customer relationships, tipping may be a way to maintain equitable relationships with service workers by reciprocating for services delivered with monetary gifts.
In some instances people tip so as to build their own self-esteem. Many scholars believe that consumer desires for social approval, status, and liking are major motivations for tipping. Such a motivation for tipping is consistent with theory and research on the need to belong, impression management, and status seeking. Most people do care about the opinions others have of them both because of the extrinsic, tangible rewards and the intrinsic, intangible (or psychic) rewards that come from being admired, liked and trusted.
U.S. consumers are also known to tip because of social norm adherence, and by doing so, consumers tip to avoid feelings of guilt and to feel satisfaction from doing what they consider is right. Such feelings of pride and guilt reflect a sense of duty or obligation to tip that stems from the internalization of tipping norms. Psychologists and sociologists have theorized and empirically demonstrated that processes of social learning and social identification often lead people to accept the appropriateness and legitimacy of social norms and to feel pride when complying with those norms and feel guilt and shame when violating them. Tipping is one of U.S. society’s most ingrained social norm.
While all of the identified social, psychological and cultural motivations for tipping are marvelous social conventions, they are ephemeral and do not constitute the basis upon which service workers can create concrete practices and systems that enhance the occurrence of tipping transactions between service worker and customer.
WHAT INNOVATING THE PRACTICE OF TIPPING INVOLVES
The increasing size of the U.S. service sector, and in particular the growth in app-based labor platforms that facilitate individual participation in the U.S. gig economy, means that an ever-growing number of workers in the U.S. service sector will depend on tips as a considerable component of their living wages. This necessarily means that the pursuit and obtainment of customer gratuities has now become an occupation in and of itself for many service workers, and workers can no longer be satisfied with tips being prospects that are dependent on fickle social or psychological motivations of the customers they serve. The practice of tipping must be refashioned to reflect the realities of the modern U.S. economy.
From this new reality, the following question emerges: what does the innovation of gratuities look like? We propose that it involves the technologizing of the relationship between service worker and customer. It involves the bundling of currently existing digital products to create digital platforms that not only facilitate the occurrence of tip transactions generated by social and psychological motivations, but that also marshal and ignite economic forces that drive service workers and customers in their interactions. Innovating the practice of tipping involves the creation of digital platforms and communities that facilitate the ability of service industry workers to have a clear idea of an individual customer’s service needs before the provision of a service, and to know with a high degree of confidence that the customer himself has an incentive to share the gains he has achieved through his interaction with the service provider by the payment of an added gratuity.
Innovating tipping means creating and putting into the hands of service workers digital and mobile tools which give them the power to proactively influence the amount and frequency of gratuities from their engagement with customers, and by doing so, providing service workers with critical and necessary work-related technological advancements for the foreseeable future. All in all, the innovation of gratuities involves the creation of digital platforms which instills in both the service worker and the customer that the payment of a gratuity is part and parcel to a win-win commercial relationship between the worker and customer.