One of the most surprising topics of policy agreement in the current presidential election cycle is proposals by the Harris and Trump campaigns to exempt tips that workers receive from income taxes.
We recently asked our Ohio Economic Experts Panel about this question, and the consensus among economists was that while this will likely help a subset of high earning tipped workers (e.g. servers in high-end restaurants), it likely won’t be an effective anti-poverty policy since many tipped workers do not end up paying very much income tax.
An alternative proposal to exempting tips from income tax could be to instead make it so the minimum wage for tipped workers is the same as the overall minimum wage. Currently, employees who “customarily and regularly” make more than $30 per month in tips only need to be paid a small portion of the minimum wage by their employer, so long as the tips they receive get their total earnings to at least the minimum wage amount. The employer needs to make up the difference if that person doesn’t receive enough tips in a given pay period. Essentially, customers directly pay the salary for these tipped workers.
But would this change help the people it’s supposed to? A new paper from David Neumark and Emma Whol suggests that increasing the tipped minimum wage may not have the desired effect on reducing wage disparities or boosting earnings. Specifically, this paper focuses on the effects of increasing the tipped minimum wage for women and for racial minorities in the restaurant industry.
Not all restaurant workers are affected equally by changes in the tipped minimum wage. Data shows that Black and Hispanic workers are more likely to be employed in non-tipped positions within the restaurant industry, such as kitchen staff, where they do not benefit directly from policies aimed at tipped workers. As a result, raising the tipped minimum wage might not significantly improve earnings for these groups, which limits its effectiveness as a tool for addressing racial wage gaps in the industry.
Increasing the tipped minimum wage has been shown to actually widen the hourly pay gap between minority and White workers in some cases. While it does reduce the gender pay gap in hourly wages, it doesn’t necessarily translate into increased weekly earnings for women due to potential reductions in working hours. This suggests that while the policy could help in reducing gender disparities to some extent, it doesn’t provide a comprehensive solution for all workers in the restaurant industry.
In contrast, raising the regular minimum wage appears to have a more significant impact on reducing wage disparities and improving overall earnings for both minority and female workers in the restaurant industry. Regular minimum wage increases help non-tipped workers, where many minority employees are concentrated, leading to higher hourly and weekly earnings. However, this comes with a caveat: while increasing relative earnings, raising the regular minimum wage can also reduce employment opportunities. Policymakers need to balance the benefits of higher wages with the potential risks of job losses.
Given these nuances, only raising the tipped minimum wage may not be the best approach to reducing economic disparities in the restaurant industry. A more effective strategy could involve focusing on raising the regular minimum wage and implementing additional measures to protect employment levels. For instance, policies that provide targeted support for training and career advancement opportunities for minority and female workers in the industry could help address some of the root causes of wage disparities.