Art Carden  

What if Tipping Became the Norm at McDonald's?

Who's Second-Guessing... Business Brainwashing and Voca...

Tuesday's article about McDonald's and minimum wages got a decent amount of attention and a lot of comments of varying quality.

Before my article appeared, Forbes staff writer Clare O'Connor had published a piece borrowing estimates from the University of Kansas's Arnobio Morelix saying that if McDonald's paid $15 per hour, a Big Mac would cost $4.67 and the items on the "dollar menu" would go to $1.17. She quotes Morelix as saying that he "will be happy to pay 17 cents more for my Dollar Menu so that fast food workers can have a living wage, and I believe people deserve to know that price hikes would not be as high as it is often portrayed." This raises two questions:

First, if you're concerned about McDonald's workers and their wages, why not just tip?

Second, if you do tip, who will be the likely beneficiaries? Please answer in the comments. I'll select the best answers and post an answer next week (actually, this looks like a great exam question). If you absolutely must know RIGHT NOW, here are pages 205 and 206 of the 7th edition of Stephen Landsburg's Price Theory, from which I used to teach micro.

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COMMENTS (24 to date)
Tom West writes:

First, if you're concerned about McDonald's workers and their wages, why not just tip?

(1) Because by pressuring McD for a price increase (an increase on prices on everyone), essentially you get a lot more bang for the amount of your tip. You've essentially forced everyone to tip.

Second, if you do tip, who will be the likely beneficiaries?

In real life, or in the economically equivalent world of "spherical cats in a vacuum" (to paraphrase my physics classes)?

Eric Rall writes:

At first glance, tipping appears to benefit the workers being tipped. It's a simple voluntary transfer from the tipper to the tippee.

One level deeper, it looks like the benefits goes instead to the employer. The addition of tipping raises total compensation, so the employer can cut back on wages and benefits by an amount equal in the workers' perceptions to the value of their tips.

However, tipping is also effectively a price increase. Assuming demand curves slope downwards, this reduce quantity sold unless McDonald's cuts their list prices to compensate for the tips. Probably the latter, since McDonald's presumably sets their prices at the level they expect to maximize revenue.

Taking all this into account:

The buyer is trading increased transaction costs (having to figure out how much to tip) for the ability to directly reward or punish the employee by varying the tip amount (which may result in better service). May be a benefit or a loss, depending on the customer.

The employee gets higher variance in compensation, since a portion of their pay is now dependant on how much their customer chooses to tip. Total compensation is probably slightly higher, to offset the increased variance. On average, this is probably a wash.

McDonald's suffers menu costs from adjusting their list prices and wage schedule, and they may gain or lose customer base at the same after-tip prices depending on how their marginal customers weigh the pros/cons of tipping. Probably a loss, based on the assumption that McDonald's policy of not encouraging tipping is rational.

Jason writes:

Presumably, baristas make near the minimum wage and they have a tip jar.

I believe I have seen tip jars at sandwich shops where an artist follows you through the customization process.

I see no reason but corporate culture to deny a tip jar to fast food employees. Maybe it just comes down to reducing conflict when it comes to divvying up the tip jar.

Which employee at McDs (or Wal-Mart for that matter) provided the most additional value to your purchase?

It's very likely that person works in Oak Brook, IL.

Gene writes:

Pressuring McD's to increase wages is too hard. Does anyone know of a protest Facebook page I can "Like" instead?

Daublin writes:

Personally, I simply don't like tipping as an institution. I tip when I go to an American sit-down restaurant, but I wis things didn't work that way. I like restaurants like McDonalds where there's a price sticker on everything and that's what you pay.

A large part of the issue is that I don't want to just give extra money to the the person bringing plates and bossing tables. What about the person that cooked? For that matter, there's also the person taking drive-through orders. Not least of all, I think the franchise owner deserves some dough, assuming they run the place well. With tipping, there's no good way for me to give money to all the people I want to give it to. It works much better if I pay at the register and then they all divide it up internally.

There's also Eric's point to consider. Whenever tipping goes beyond something extra and into the territory of a cultural expectation, the white-market wages the people make will go down correspondingly. Thus nobody wins from tipping in the long run; it just means the actual amount of the transaction is in a gray area.

Most of all, I just prefer living in a society where the real rules are written down and obvious. If McDonalds workers really deserve extra money, then let's just give them money.

Jeff writes:

Well, in the post, you only mentioned McDonald's employees. So on that basis, I'd conclude thatif tipping became the norm at McDonald's, Burger King/Wendy's become the primary beneficiaries.

Marcos Portillo writes:

The way I always looked at it, restaurants (not necessarily fast food) paid their servers "server wages" because the servers also got paid in tips. Restaurants usually have faily thin profit margins (which is probably why they are usually hurt by minimum wage hikes more than other industries). Their labor costs are essentially shared by customers. Server wages are split between the employer and the customer tips. Tips aren't a bonus, they're the employee's actual wage. If tips were outlawed, 100% of the labor cost would return to the employer, and due to thin profit margins, most likely would lead to increases in their prices (so essentially customer ends up paying the same, but visible higher prices could adversely affect demand).

If for some reason, customers decide to take on a share of employees' wages in the form of tipping them, the employer would most likely, in the long run, lower the employees' wages. The employer would no longer be shouldering 100% of the labor cost since customers for some reason decide to pay a portion of the employees' wages.

You can't artificially raise the price of server labor above the market price. By tipping servers extra, who are already getting paid the market price, will only lead to the employer lowering his share of that server's price. The supply of potential servers isn't exactly low enough to make it expensive.

Unless of course, minimum wage laws prevent the employer from lowering the employees' wages further. Then I guess the tipping would increase the employees' wages. But then again, if they're getting tips then maybe the employer can legally start paying them server wages!

Either way, I think it'll be a wash. Market will clear to the point that the employees' wages in one form or another will return to the market wage. The employees, in the end, won't be getting paid anymore then they were before. All that will happen is the structure of payment will be shuffled around.

TheDjinni writes:

"Before my article appeared, Forbes staff writer Clare O'Connor had published a piece borrowing estimates from the University of Kansas's Arnobio Morelix saying that if McDonald's paid $15 per hour, a Big Mac would cost $4.67 and the items on the "dollar menu" would go to $1.17. She quotes Morelix as saying that he "will be happy to pay 17 cents more for my Dollar Menu so that fast food workers can have a living wage, and I believe people deserve to know that price hikes would not be as high as it is often portrayed."

A miniumum wage hike affects more than just the price of employees of the local restaurant business. It also affects the prices of everything you buy that more than nominally employs minimum wage employees.

I wonder if the research accounts for this fact. I'm going to guess not.

(Just checked the article, and no, he didn't)

Floccina writes:

In the short run the tipping would help the current workers. In the long run the tipping would help would help the better workers who replace the current workers. (It might also help he state lotteries - daily cash spends so easily.)

JG writes:

I do tip at places that have tip jars if the people behind the counter does any prep work about 90% of the time. However, McDonalds doesn't have a tip jar! I'm sure they've determined that their clientele don't like being pressured to tip and it's actually the equivalent of a "soft" price raise, but I think that gets a little hand-wavy for the hardcore models that are often assume to be true before any analysis starts.

I agree with the overall conclusion with your analysis on "why don't we just raise prices and not pay employees more" type argument. McDonalds is a pretty interesting case because within McDonalds there's a huge variation of employees making different wages in many cases BECAUSE minimum wage is different in different states. McDonalds extracts higher than average value of employees with little to no skills. Now it's possible prices are higher by the effective costs in those states, it's possible it's not, but one thing we could do is MEASURE it.

Maximum Liberty writes:

> First, if you're concerned about McDonald's workers and their wages, why not just tip?

Because you are mainly concerned with signalling what a good person you are. Taking a public position about how McDonald's ought to raise its wages is a more visible and cheaper signal than privately leaving a tip.

> Second, if you do tip, who will be the likely beneficiaries?

Me, because I will feel good about having rewarded good service. But, depending on my views of politics, I might feel less good than if I displayed how virtuous I am by publicly decrying McDonald's.

I would add to Eric Rall's analysis that the tax man probably gets less from attempting to tax tips than he does from taxing wages.


Hana writes:

Slightly off topic, I noticed when I visited the Price Theory link the cost of the ebook. It was available for $248.99. Wow, that is a year's worth of dollar menu.

mickey writes:

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BucketofFried writes:

As far as who will benefit, it will not be the current McDonald's workers (at least not for long). The current staff will be replaced by "higher quality" candidates whose Marginal Productivity more closely aligns with the new wage rate.

I didn't steal this from the link (if this is indeed similar to the Landsburg link). I believe Boudreaux had a post to this effect a few months ago.

dave smith writes:

Eric Rall gave a pretty good answer. I quit reading, so other might have given good ones too.

Seth writes:

"Second, if you do tip, who will be the likely beneficiaries?"

The folks who make "Pay @ the Pump" for McD's.

ThomasH writes:

If I tip, will McDonald's raise their wages to $15/hr?

tom writes:

Tipping means the server/cashier has an incentive to pay extra attention to individual customers. In sit down restaurants this is fine where part of what you are paying for is frequently ambiance, comfort or the experience. In McDonalds you are paying for quick service and working for tips causes incentives that conflict with that. Corporate wants their employees to be courteous, polite and fast, they don't want them chatting up customers beyond the basics.

At a restaurant you might get "Hi, I'm _____, how are you guys doing tonight?" but in McDonalds its "Welcome to McDonalds, can I take your order?" Fast food places have no desire for the latter to turn into the former.

Who benefits from tipping? Cheapskates, especially in a fast food setting where the service they will receive will still be relatively equal even if they are identified as cheapskates (ie freeriders).

Also, as always, anyone who doesn't eat at McDonalds wins.

brad writes:

No one else tips at McDonald's, so I don't. However, if there were a tip jar - that is, it were encouraged - then I would be more inclined to tip. I tip at Starbuck's because I think the employees are underpaid and, for the most part, doing a great job. I am more inclined to tip when I know that I'm not the only one.

Ken P writes:
Second, if you do tip, who will be the likely beneficiaries?

Possibly Mc Donald's because they will continue paying minimum wage (plus likely continue to give increases), but will be able to compete with higher paying employers for better workers without spending their own money. Of course, the expectation of tipping may cause customers to choose other fast food restaurants, in which case other fast food restaurants would be beneficiaries.

Attractive people and those with fun personalities would likely benefit, as they tend to get better tips.

People currently employed at minimum wage would benefit, because they would be more likely to be hired for these positions than people who are currently unemployed.

Accountants may lose by having to deal with inventory mismatches if workers began giving out the occasional free drink or burger here and there to good tippers.

Those currently unemployed, but good candidates for Mc Donalds would likely lose because at the higher wage, more desireable candidates will apply for the same jobs. If you are applying for a minimum wage job, most other applicants are likely also unemployed. This is not true at higher starting wages.

Tim writes:

The point that Art is trying to make here is that if we started tipping people at McDonald's than their average wage over time would go down. The reasoning for this is as people start tipping the workers, there is incentive to enter working at McDonald's. The problem is, if we do this over time tipping becomes customary and expected. People from other industries where the wages are similar will soon start flocking to McDonald's. This causes two things to happen. First, McDonald's work becomes a tip based job there fore minimum wage is no longer a requirement to work there. Also, the wage at McDonald's will average out to the wages in the other industries as the ability to move in and out will equal all of them out over time. In essence it's a zero sum game. The people in theory who would benefit would be the workers. As the tipping, would have to increase the wages for all the workers to remain competitive. It would also benefit the businesses, as the customer is directly paying the wages to the employee for service. The problem is in application. The average wage in the US for a tipped employee is $11.82. This is more than $7.25 minimum. It is still on average quite low($12.16 less than average of all working people at $23.98). If fast food workers were added to this segment, I am estimating the average wage for tipped employees would go down. If we were however able to actually increase the pay to our lowest level workers(retail and fast food alike) they may not be so reliant on public funding and more apt to spur further economic growth.

alex writes:

echoing tom west i agree that one person tipping doesnt accomplish the same thing as a policy requiring higher wages.

so what does a 'tipping policy' do? Well it will probably not help the workers. more tips mean greater supply of workers means lower wages. who benefits, then? employers get to pay less and tippers might feel better about themselves.

Isaiah writes:

Question 1:

From the "moralist" McDonald tip giver's perspective, seeking to improve their working conditions is a collective action problem. A single tipper cannot hope to help even a small number of McD's workers improve their standard of living.

Question 2:

I would think if tipping became the norm you would have two large "winners" and "losers."

Tipping is more variable and therefore wages are less predictable. I would therefore expect the total payout to be sightly higher (wages + tips > wages alone) to compensate for the extra risk. The winners would be employees more capable of bearing the risk, whereas the losers would be employees who are risk averse. My guess is teenagers and young people have a greater appetite for risk because many of them have a safety net and are biologically risk takers. Therefore, my guess is you would see a shift in employment between older people towards younger people. Therefore, my first winner is younger people and my first loser is older people.

My second winner is free riders within the customer base. These free riders may actually create more business as the cost of going to McDonalds becomes cheaper for them. The losers would be good tippers, as they need to subsidize the free riders. Of course, this will drive some of them out of the market.

On balance, I think you would only see change in profits and purchase volume at the extreme margins. As such, I do not think customers in general or McDonalds would be big losers or winners.

John Thacker writes:

Some stories on the McDonalds claims have been pulled or corrected, noting that the original numbers only included labor costs from McDonalds corporate-run stores, which are only 20% of their stores. That combines with of course all the products sourced by McDonalds from other companies in their supply chain.

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