The Tipped Minimum Wage

• In Event: How Minimum Wages Work: Activism, Organizational Responses, and Worker Outcomes

Abstract

The restaurant sector is a large source of low-wage employment in the United States. In 2024, restaurants and bars employed 8.5% of all private-sector workers and nearly one-fifth of workers in the bottom decile of the earnings distribution.  Unlike most low-wage industries, restaurants finance a substantial share of labor costs through customer tips rather than wages. Understanding the effects of tip regulation is therefore central to the design of effective labor market policy.

Tip pay is governed by a two-tier wage floor. Employers may pay tipped employees a sub-minimum base wage so long as the sum of base pay and reported tips equals or exceeds the statutory minimum wage (MW). State-level policy debate over the tipped minimum wage (TMW) has intensified in recent years, with ballot measures and legislative battles across states such as DC, Massachusetts, and Michigan. Yet, a central empirical question remains unresolved: can firms adjust tips in response to the policy, and if so, how are the effects on earnings and employment shaped by that margin of adjustment?

This paper uses US tax data (W-2s linked to firm tax returns) to provide firm-level evidence on the effects of the tipped minimum wage and minimum wage in the restaurant sector. We leverage state-level variation in both the MW and TMW policies from 2003 to 2019 in a staggered event study design. Our design estimates the effects of each policy while controlling for dynamic effects of the other. Our data allow us to separately measure base wages and reported tips, study effects across the within-firm earnings distribution, and examine firm-level outcomes including revenue, the tip rate, and tip pooling.

We find that a 10% increase in the TMW raises base wages of tipped workers by about 3.5% but decreases tips by enough to at least fully offset the increase in base wages. By contrast, the minimum wage causes earnings of tipped workers to increase mostly through tips. Changes in tips are driven primarily by changes in the tip rate (tips as a share of revenue)—consistent with firms adding service fees, adjusting suggested tips, or shifting toward lower-tip output—rather than by tip pooling or revenue-per-worker changes. Tips move similarly for workers across the within-firm earnings distribution, suggesting firm-level policies, not worker-level adjustments, drive the response. We find negative effects of the TMW on employment and revenue. A monopsony model where tips and wages are imperfect substitutes to the firm can rationalize these results. Through the lens of our model, the empirical results imply that—even if the worker prefers wages to tips—the overall package of lower tips, higher wages, and lower earnings makes the marginal worker worse off. The results suggest that the standard minimum wage is a more effective policy tool to help tipped workers than the tipped minimum wage.

Author

• Ishaana Talesara, Texas A&M University
  Presenting Author