Restaurant Tipping and all of its Inefficiencies

Lady Celt and I were in Olive Garden the other day getting a quick lunch before going to BJ’s to stock up on non-perishables.  Being the financially savvy guy I am, I know that going to a wholesale store on an empty stomach is bad news bears.  Buying 15 boxes of Goldfish crackers “because I was hungry” probably won’t go over smoothly once I get home.  So we’re in Olive Garden, munching away.  Our service isn’t bad, but I also don’t think it was great.  While there I began thinking about our service at another Olive Garden a month or so prior (don’t judge me.  We’re trying to use gift cards from last Christmas).  At that meal, our server was excellent.  She interacted with Mini-Celt nearly every time she was at the table and was friendly and prompt.  While thinking about this, I got kind of annoyed.  Our so-so server got a 15% tip, while our server before got 20%.  That 5% difference is worth $1.50, maybe.  Yet the service was markedly different and left vastly different impressions on us.  And then I remembered something. . . That’s exactly why I hate tipping.

So on the drive to BJ’s I began to think about the varying levels of service and quality of restaurants.  We were at a more upscale restaurant back in August for Lady Celt’s birthday.  We had the Mini-Celt so we decided to go just before the dinner rush to avoid upsetting everyone trying to enjoy their Friday night dinner.  Our server was training this new fellow.  Not terrible I suppose, this is an upscale establishment – he probably has experience; I’ll cut him some slack if he fumbles over the menu.  He clearly lacked server skills.  However, his trainer was professional and tried to make up for his shortcomings.  They got 18% on a bill over $100.

These stories all reinforce how much I hate tipping.  It’s not efficient, it’s not economic, and it’s not based in meritocracy.  Rather, it’s got a murkier past.

The History of Tipping

Tipping is not an American past-time; rather, it’s imported from the Europeans.  Ironically, Europe has forgone the tipping system, while it is alive and well today.  In an even more ironic twist, Europe got rid of tipping due to the American tipping abolition movement in the 1890-1925 section of our history.  The abolitionist movement ultimately failed in America, however Europeans took to the notion that it employees should be paid by their employer, rather than the customer.

This abolition movement was rooted in two things.  The first is that nobody wanted to feel they had to pay an indemnity for prompt or efficient service.  If you’ve read F. Scott Fitzgerald’s “This Side of Paradise” you’ve read this sentiment.  In the scene where Alec is busted for hiring a prostitute, the prostitute begrudgingly notes “Alec didn’t give the waiter a tip, so I guess the bastard snitched”.  Can you imagine being held hostage like that?  What if you’re at an important business meeting at one of your favorite restaurants and just about to close the deal with a handshake.  Abruptly, your waiter, knowing you’re a lousy tipper, comes up and says “I wouldn’t shake his hand.  He never washes them after he uses our bathroom.”  Boom, deal sunk.  At the very least, you’re incredibly embarrassed.  All for your tipping transgressions.

Nobody likes tipping

Look at all the people who like tipping!

The second reason why people were anti-tipping was class based.  Tipping a white person was considered offensive.  Whites didn’t need to be tipped.  Tipping was to show someone’s inferiority and whites weren’t inferior.  Blacks were inferior so they got tipped.  Remember – we’re talking late 1800’s, early 1900’s.  Blacks were also, primarily, the staff in a restaurant.  Restaurant’s got their start due to industry and factory workers in the city.  In an agrarian society, everyone eats at home; however, now these workers are in the city, far from home.  They need a quick bite to eat, but don’t make a lot of money.  How do you sell a poor person food while still making a profit?  You employee people more poor than the people you serve.  That meant blacks.

Ultimately, the anti-tipping movement faded with a whimper and tipping became an American standard.

The Economics of Tipping

The idea of tipping in current culture is that it incentivizes productivity and competent service.  That might be the case if tipping were optional.  But it’s really not.  Just this morning, I saw a Facebook video from Fox News whose headline was “How to Tip Without Being a Jerk”.  Basically, everybody gets tipped.  If you get lousy service, they get 10%.  Excellent service gets up to 25%.  How can a system that is designed to provide incentives have a wage floor?  How can something this is allegedly optional, have such a powerful marketing and congressional lobby?

The main argument that people list for keeping tipping around is that it will increase the cost of eating out.  Which is funny, because that’s not really what economic theory and data say, at least not to the extreme that people make it.  The rationale is that if the owner has to make up the wages and pay his employees an actual wage, his prices will go up to cover the cost.  Except, that would be imprudent.  Increasing his price 1:1 would cause a shift in his quantity demanded – it would not affect his supply or demand for his food.  Depending on the cost structures, that could cause a loss in revenue, on top of thinning operating margins.  So sure, some of the cost would be passed on to the consumer, but not all of it.

Rather than being so focused on the cost and supply structure of the restaurant, the owner should be focused on the demand side.  After all, he is in the service industry.  Looking at how to change consumer preferences (i.e. marketing) or increase the market share would be a more prudent solution.  That way the owner would not only have more patrons, but they could also raise the price of services with a less negative connotation.

There is also one more thing to consider.  Let’s say the federal government outlaws the tipping standard waiters and waitresses are guaranteed a minimum wage or more for their work.  The owner can provide efficiency wages now.  This would provide some cushion to the servers in higher-end restaurants who make a great income from having their wages watered down with new legislation.  This efficiency wage would make it harder for an employee to quit, and also provide incentive to keep the service up.  After all, if they don’t, the opportunity cost of being fired and being forced to work at a lower wage for the same work is very high.


Tipping is economically inefficient.  I can pay 18% to the same servers, who do the same work, and one server makes drastically more money simply because the food served costs more.  Talk about a wage gap!  Further, when you consider the racial tinged history of tipping in America, plus some other unwanted factors – like the fact that sexual harassment is tolerated because the tip is the carrot, it places the customer as the employer, and minorities and women make objectively less based on social biases – tipping really just don’t have a place in modern culture.

On the note of sexual harassment though, in states that have passed regular minimum wage for restaurant workers, rather than the sub-minimum of $2.13, sexual harassment claims went down.  Why?  Because the server didn’t have to stand for being openly groped or objectify themselves for a higher tip.  Isn’t a worker being allowed to feel like a person, rather than a valueless asset, worth an extra $1.50 for your burger?  I’d say so.


Readers, what are your thoughts on tipping?  Do you believe it provides better service across the board?  Does it annoy you that servers at high-end restaurants make significantly more for the same work?  Let me know in the comments below!  If you haven’t yet, check out my Cash Flow Celt Facebook page.

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Cash Flow Celt

I'm just a local business and finance nerd looking to help people get educated about small business, marketing, and personal finance! I write about anything and everything that I can tie into those themes. I'm also Central Florida's only Kilted Realtor, so I write about Real Estate too! Check out my About Me page to see the origins of Cash Flow Celt.

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4 Responses

  1. Jack Catchem says:

    Great article, Celt. I’ve worked several jobs supported by tipping and I did not like it at all. By all means, just pay me more and expect me to do a good job because I value my own work product.

    Also, there is the concerning issue of creeping expectations. 10% used to be “good” in California and 15% “great.” Now, just like everyone getting “A” grades at school, the curve has shifted and 15% is the norm.

    I’m also lazy, don’t make me evaluate your employees. I just want to pay a cost, not be their new supervisor!

    • Cash Flow Celt says:

      It’s funny you mention the uptick in “normal” tip. In my lifetime, I’ve only ever known 15% was average, 18% was a “good lunch” and 20% was dinner. But I’m with ya, just pay them more and increase your prices. An efficient restaurant is known to have some sweet operating margins (like 10% or more per item). On the whole, the restaurant industry enjoys an 8.99% NET operating margin compared to an average net of 6.4%. They can afford to pay their employees, they just won’t.

  2. Cathy Colangelo says:

    I agree in theory. However, you did not recognize the common practice of pooling tips. Further inequities come from aspects of serving that are genuinely beyond the servers control such as the cook’s work and the bartender’s. Restaurant work is, and always has been, cutthroat. The servers tips are just the “tip” of the iceberg.

    • Cash Flow Celt says:

      Removing the tip or axing it to the point where tipping happens on occassion – like tipping your Starbucks barista – and just increasing the wages for all parties would largely remove that.

      It would also enforce accountability. When the steak comes out well done instead of rare, or the bartender waters down your $8 cocktail, the waiter doesn’t have to kowtow to the customer. They can simply say, “I apologize for the inconvenience; however, XYZ must have mixed something up. We’re already in the process of fixing it.” No longer do they have to pander and pray for a benevolent customer.

      Plus you’ll remove the pay inequity between jobs. Bus boys make very little, servers make more, and bartenders can pull down some big bucks for just a few hours of work. Like I mentioned to Jack Catchem above, the restaurant industry as a whole operates an 8.99% net operating margin, with an efficient restaurant running upwards of 12-13%. They have the cash, they just choose not to use it.

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