Some Economics of Tipping

Why leave a tip? You have already received whatever food or service you are going to receive.

Maybe if you are a very regular customer, tipping could lead to better service in the future. But most people who leave tips do so even if they are stopping off at, say, a restaurant in a city they are never going to visit again, or getting a ride from a driver they will never meet again.

Tim Sablik discusses the evolution of the tipping norm in “Tipping: From Scourge of Democracy to American Ritual,” subtitled “Over the course of the 20th century, tipping went from rare and reviled to an almost uniquely American custom. We still like to complain about it” (Econ Focus: Federal Reserve Bank of Richmond, First/Second Quarter 2024, pp. 18-21).

Part of what makes tipping especially interesting just now is that norms about tipping seem to be in flux. In particular, the pandemic and new technology seem to have given tipping a boost. Sablik writes:

According to a Pew Research Center survey released in November 2023, 72 percent of Americans agreed that tipping is now expected in more places than it was five years ago. Social media is filled with stories of customers being asked to tip for all sorts of transactions where that custom previously wasn’t the norm: buying office furniture, going through the drive-thru, or even paying for lunch at a self-checkout.

A few factors seem to be driving this trend. A growing number of businesses have adopted more sophisticated point-of-sale payment terminals and software developed by companies such as Square and ShopKeep. Square reports that it processed 4 billion transactions in 2022. In addition to allowing small businesses to easily accept non-cash payments, these point-of-sale devices give owners the option to include a tipping prompt as part of the checkout process.

There is also some evidence that customers increased tipping during the pandemic. Michael Lynn, a professor of consumer behavior and marketing at the Cornell University School of Hotel Administration … found that tipping frequency declined at restaurants in 2021 and 2022, but the size of tips went up. In another study of data from Square, Lynn found that the size of tips also went up for quick-service and takeout restaurants in 2020 and 2021. Lynn and others have hypothesized that many Americans felt increased compassion for service workers during the height of the pandemic, prompting them to be more generous. This experience, coupled with the inflation of the post-pandemic recovery period, has given businesses more incentives to ask for tips.

If norms about tipping are indeed in flux, it wouldn’t be the first time. The standard history is that tipping originated in western Europe, was brought back to America by US tourists in the later part of the 19th century, and now has largely died out in Europe but become entrenched in the United States. Sablik offers a lively overview of some previous tipping norms:

In his 1998 book Tipping: An American Social History of Gratuities, historian Kerry Segrave placed its origin in the Middle Ages. In 16th century England, wealthy travelers who came to stay in a friend’s home would give money to the host’s servants. These sums of money, known as vails, were intended to compensate the servants for taking on the additional work of caring for the guests on top of their regular duties.

The custom grew quickly. Household servants came to expect and even demand vails, to the growing irritation of travelers. Segrave noted that by the 18th century, even British royalty complained about the rising cost of staying with friends because of the vails. House staff reportedly went so far as to threaten guests who refused to pay. Ungenerous guests might be met with spilled food at the dinner table or an injured horse in the stables. Some nobles reduced their travels to avoid the issue altogether, while others tried to band together to abolish the practice. Such efforts met fierce resistance. A meeting in London in 1764 to discuss the banning of vails was disrupted by servants throwing rocks through the windows of the meeting hall.

Tipping was not welcomed as it spread into the United States:

Still, tipping continued to face fierce opposition as it spread in America. Unions in the early 20th century frequently opposed the practice because they felt it stood in the way of workers being paid fair wages and left them too dependent on the whims of customers. Business owners, particularly hotel managers, also feared that the proliferation of tipping requests would annoy and drive away guests. Some hotels installed something called a Servidor in guestroom doors. It was a compartment that could be opened from both sides, allowing hotel staff to leave cleaned laundry that the guest could then retrieve inside the room without meeting the employee face-to-face and being asked for a tip.

Between 1909 and 1915, six states (Arkansas, Iowa, Mississippi, South Carolina, Tennessee, and Washington) took things even further, passing laws criminalizing the solicitation and giving of tips. Violators were subject to fines and, in the case of South Carolina, even jail time. But the laws proved ineffective and were largely ignored; by the 1920s, they had all been repealed (or, in the case of Iowa, overturned by the state Supreme Court).

In modern times, a number of US restaurants have experimented with a compulsory tip added to the bill. This step is understandably popular for owners of restaurants, who can then decide how to disburse the money. It’s generally unpopular among those who would have received a higher share of the tips, and also among customers, who often act as if tipping is required but prefer to think of it as voluntary. In most cases, the combination of unhappy customers and (at least some) unhappy employees means that experiments with a no-tipping policy have faded out.

I liked a comment at the end of Sablik’s article. Michael Lynn, who has done research on tipping, was asked by Sablik “who benefits from tipping.” Lynn answered: “”People who don’t tip very well … They’re being subsidized by the people who do.” That’s plausible, but is it that simple?

For more on the economics of tipping, a useful starting point is Ofer H. Azar, “The Economics of Tipping” in the Spring 2020 issue of the  Journal of Economic Perspectives (where I work as Managing Editor.)