Tipping

Tipping is an ordinary practice when you go to a restaurant for a meal, when you go to a bar for a drink, or when you buy a latte at a coffee bar.  Tipping typically does not happen for much other service work.  But now we live in extraordinary times where many of us are staying at home much of the time to avoid getting infected with the coronavirus.  Essential personnel don't have that luxury. They are out there working for our benefit.  Yet they are paid poorly.  This Thomas Edsall column gives a detailed look at the situation.

And a state-by-state survey conducted by Business.org found that “Nationwide, essential employees earn an average of 18.2 percent less than employees in other industries.”

On the other hand, most everyone is grateful to the essential personnel for the services they render.  On a walk I did recently that took me by the little shopping center not far from my house, I noticed a banner posted that thanked the essential personnel for the work they do.  I'm sure it is nice for essential personnel to hear the gratitude from the people who rely on their services rendered.  Yet there is the famous line from Jerry Maguire that is more than apropos, "Show me the money!"  And, at least for me, I'd be willing to pay more for the service rendered, if I knew that incremental payment was going to essential personnel who were involved in delivering the service.  The rest of this post is written based on the guess that there are many others who also would be willing to pay more if the payment did raise the income of essential personnel, enough so that it would be more than worthwhile to incur the costs to make that a reality.

I want to make two basic points.

(1) The companies that employ these essential personnel can't reduce their wages, once tipping has been introduced.  Doing so, which is what you'd predict would happen in a "perfectly competitive labor market" (economics jargon for saying that the market sets the going wage), would completely undermine the reason for tipping.  So, companies that did embrace the tipping would need to make a public commitment about not reducing the wages of essential personnel.  This might very well require also making public what the hourly wages for these people are. At present there seems to be a sentiment to have more transparency in employee compensation.  Having an effective tipping program might encourage that.

(2)  In the examples I gave in the first sentence of this piece, I prefer to tip in cash, even if I pay the bill by credit card.  That way I know the tip goes to the server, which surely happens in the restaurant and bar examples. At the coffee bar it is a little different.  There usually is a jar set out for cash tips.  The tips are then shared by the baristas on duty.  It's this sharing of tips possibility that I want to flesh out with this point.  My contention is that if the pool of employees with whom the tips are shared is comparatively small, then the incentive to tip is reasonably strong. But as that pool gets bigger and bigger, it dilutes the incentive to tip.  I wrote about a similar idea, why many rich people want to avoid paying taxes but are willing to give much of the their wealth to charity, in a post called Mattering Bias.  Likewise, I believe those giving tips to essential workers want their tips to matter.  That requires some mechanism that doesn't dilute the tip too much and perhaps also is able to show the person giving the tip where the money actually went.

Now I want to get into some other particulars that may be worth thinking about.  Let's consider two different examples, a) buying groceries and then tipping the cashier (plus the person who bags the groceries) and b) ordering something from Amazon that is delivered by UPS and tipping the delivery person.   In (a) you would pay the tip along with paying your bill, immediately after the service is rendered.  Even with that you wouldn't want to tip by cash now as that might increase the health risk.  So, as with the second example, all the tipping would be by credit card and thus there will be a record of the transaction, itself something to reflect on.  But in this case the size of the tip might depend on the shopper's experience at the store.  If my experience is any indication, while stock outs of some items are now part of the new normal, the real issue is how long you have to wait to get to an available cashier, after finishing shopping.  I normally go to the grocery between 6 AM and 7 AM, a time slot reserved for senior citizens.  Sometimes they have only one cashier going then.  Other times it's two.  I don't know if later in the day they have more than that or not.  But the waiting is an inconvenience.  I might tip more if I didn't have to wait.  With (b), you prepay at the time of ordering.  So the tip can't be based on the performance in that transaction, but it possibly could be based on the performance history.  I don't recall having any issue with orders from Amazon prior to the pandemic, but since then some orders have been wrong  and one never got through so I got a refund.

The point is that with the data collected, it might be possible to come up with social norms for how much to tip.  When I was a kid I believe the norm for restaurant tipping was 15% of the pre tax bill.  (I'm curious to know what people perceive was the current norm before the pandemic started.)  It seems possible to develop norms for cashiers based on - what fraction of shoppers tip, what's the average tip rate of those who do tip, how much do cashiers make in tips per hour on average, and possibly other like variables, providing this information in aggregate so as not to compromise the privacy of information of any individual transaction.  If such norms settled down reasonably quickly, the mechanism might then be effective in raising the pay of this type of essential personnel.

Likewise, this could be done for the UPS driver, although here some other relevant variables might matter.  I live in a community called Robeson West.  On most weekdays you will see a UPS truck in the neighborhood, also an Amazon Van, and reasonably frequently that will happen more than once a day.  How many stops they make in the community matters for what the norm for tips should be locally.  That sort of information, based on recent historical. data could be provided as well.  Where we used to live before moving to our current house was more in the country.  By rights, tipping at the old house should be higher, because the driver won't have as many stops in that neighborhood, and the customer should have a sense of that.  Alternatively, it may be the quality of service is lower there, e.g., the time of day that delivery is made might be much later, on average. so the items sit in the delivery truck for a longer period of time.

With these caveats, tipping of front line essential personnel might be effective and a reasonable way to raise their earnings to a more socially acceptable level.  But what about other essential personnel who are more behind the scenes?  At the grocery, these are the people who stock the shelves.  Yet they are hardly the only ones working behind the scenes.  We should go further to consider much of the supply chain, particularly the warehouses where non-perishable goods are kept, received from primary suppliers and subsequently shipped to individual groceries.  The people working in those warehouses are also essential personnel as are those who drive the trucks that move items to the warehouse as well as other trucks that move items from the warehouse to the groceries.  Will tipping of the front line personnel have any impact on the wages of those other essential personnel who are more removed from the customer?

Directly, I'm afraid the answer is no, which is why tipping should be thought of primarily as a near term answer until more comprehensive long term answers can be found.  Readers might consider raising the minimum wage substantially as the appropriate longer term response.  But our economy is very weak now and under these circumstances raising the minimum wage might very well lead to current employees getting fired.  A few years ago I wrote a post about wage subsidies, which would be a better approach under the current circumstances, and might be done in demonstration mode before it became official policy.  But setting up such demonstrations would itself take time; I'm guessing much more time than it would take to get a functional approach to tipping in order.

Returning to the wages of those more remote personnel, one might imaging that those shoppers who don't tip would not care about these workers at all.  Such shoppers would like the lowest prices possible for the items that they do buy.  Those who tip regularly, however, might be willing to accept higher product prices if it meant those remote personnel were paid better.  If so, and if those who tip regularly constitute a big fraction of the company's business, then raising wages on the more remote personnel might make good business sense as a way to build customer loyalty.  Under ordinary circumstances these sort of calculations have already been accounted for in how the company does business.  For example, contrast Trader Joe's with Walmart.  But the pandemic may have changed things sufficiently to have another look at this question.  The tipping of the front line employees would inform on this matter.

Let me wrap up with a brief mention of the logistics needed to be put in place to make the tipping discussed in this piece a reality.  Those logistics are beyond me.  For those who might be able to seriously work them through, the question will be, does it make sense to do so?  Two factors will increase the likelihood that it does make sense.  The first is that we will be living in this pandemic world for longer than we hope, perhaps another year or so.  The second is that others develop a buzz about tipping as a near term way to reward essential personnel.  I've never had a post of mine go viral, so I have no direct experience that speaks to how to create such a buzz.  Maybe readers of this piece who find the idea intriguing might have a better sense of how such a buzz can happen.  At a minimum, both of those should be considered with some care even as the idea might spread.