Service, Please!

Speaker 1

Come on, throw in a bug. You don't You don't believe in tipping? I don't believe

Speaker 1

Welcome back to Happy Hour Econ. We're a comedian and an economist walking to a bar on Lou Perez, the comedian. And I think this might be our most important episode to date because, you know, we're talking about going into bars and the question always comes up, what do you tip your bartender? What do you tip your waitress? Are you a good tipper? I think more than anything, that's what everyone wants to know. Is Phil Magnus a good tipper? And I'm Phil Magnus, The Economist.

Speaker 2

I get good service, I'm a great tipper. If I get neglected, if they're passing over me, or if my food arrives cold and my drink doesn't get poured when I order it, well, then what do you do? You alter the tip that you give. Over the holidays, I tipped my mailman and I tipped my garbage man too. And it turns out, I guess I only tipped one of the mailmen because on my route, I've been seeing new faces of mailmen. So I don't know if they know that I gave the other guy money and I don't know what impact that's going to have on how they, you know, are they just going to deliver me more bills? Like just other people's bills or they're going to find a way into the, into my mailbox? So yeah, if you start only getting mail on Tuesdays, then you know which one you tipped. But now I think I set myself up in that now isn't it expected of me that next time around the holidays I'm gonna have to give them more money It's a cycle of endless tipping that's entered in here.

Speaker 1

you tip cash or do you tip on the credit card? What do do? try to tip cash if I have it in my pocket, it in my wallet and available, although, you know, there's an interesting dimension of tipping. It's probably the biggest change in the practice in the last four or five years is the integration of tipping into every single credit card machine that you see. And, you know, there's kind of a debate about this because conventionally tipping was for true service industries. It's for your waiter, your bartender, the porter that takes your bags to your room in the hotel. tell an actual service rendered and now you're going into Starbucks and it's like the guy that just stuck your paper cup under a machine and hands it to you and there's an option to you tip them 15, 20 or 25%. And it's automated in your credit card swiper. And I think some of this has actually created a little bit of a backlash against tipping culture in the United States that you're being bombarded for requests for tips at every single transaction, whether there's a serious service has been provided or not. And that's kind of distorted some of the economics of tipping. Yeah, pardon me anytime that I, you know, say I order like a donut and the guy just took a donut and put it in a bag and then gave it to me. like, there was actually nothing done there that

Speaker 2

Timely delivery of the doughnut. Yeah, like he literally had to reach out like two feet and then bring the donut and put it in a bag. You know, one thing though, I think I'm happy about is that you no longer have to do the math yourself on the tip. They give you all the different choices now, whether it's on the bill or it's gonna be on the screen. So it's like the ones that I've seen, it's like 20%, 22%. 25 %? I wonder if there's if there's a point where they're like, we can't, like, we can only ask for 25 % like asking any more than that. We're ridiculous. You know, there's been a trend in tipping, and I've seen some studies of this. They go back in the 1950s, like the typical restaurant tip that people left back then by convention was 10 to 15%. And then over time, it's edged upward to 15 % became the new norm, then 20 % became the new norm as tipping culture really took off. And I'd argue this is actually a good thing. This has been beneficial to the service industry, and it's why tipping tends to be very popular among the service industry. It's a way to differentiate your product to the customer. If I really focus my attention in making sure that this table I'm waiting on is well serviced or this customer at my bar is receiving his or her drinks on time and has good conversation, good atmosphere, if there's something extra that I can do, then it's kind of implicit that I expect a higher tip, but there's this signal being sent by my service to the customer and then vice versa, the customer, if they appreciate what I'm

Speaker 2

doing for them, they signal with the higher tip. So there's a ratchet upward that has really kind of come through the culture as tipping has become more widespread. Something that just came to mind is when I order takeout, but it's for pickup. Yeah, should I tip because I'm you know, I'm looking at it I'm like, you know, say it's like 60 bucks and I'm like, this is 60 bucks, but I'm not eating it here. Nobody delivered it to me, but I feel so guilty not tipping on that. Well, they kind of guilt you into it by building it into the credit card machine or the receipt they're handing you. like, by the way, would you like to add a tip even though you're just picking it up in a bag from the counter? Now, I differentiate that if I ordered something like Uber Eats or Grub Hub or one of these services where they're actually driving it to my home. Yes, I want to tip the driver provided that they get it to me in a reasonable time. If it's three hours late and it arrives cold, then that's a different story. But here's the thing, if it arrives in a timely manner as promised, I'll give a very healthy tip on that. You're talking 20%, 25%. If it arrives late, you may not give them a tip at all. Yeah, I've seen a lot of awkward interactions between delivery drivers confronting the customer who has not tipped them. Because you usually have to do the tip before they even make it to you. Which sounds like a dangerous kind of way to play it.

Speaker 2

Right, right,

Speaker 2

way to get spit in your food. Yeah. man, now I'm thinking about the last time that I ordered something, like, was the tip good enough? I hope it is. Or then you'd have like just like a psychopath who doesn't care. That's their thing. They're going to do that anyway. When it comes to pricing and stuff, like with delivery and that sort of thing, one of the arguments that I hear often is just, it's just so insanely expensive. to like deliver something. Say it's like a $10 burger and then depending on where you live, all the extra charges that are put on top of that, just turned the $10 burger into like a $40 burger and you're like, Yeah, what's going on here? Well, it depends on the time and circumstance. We think in price theory, why do we purchase something at a given price? Does the consumer and the seller meet together at a common point of intersection? When you're ordering a burger that has all these weird upcharges and delivery fees on it, think about what you're doing there. It might be you're ordering something in the middle of the night because you're hungry and it's after hours. you might be willing to pay a lot more to get that burger delivered at 1130 at night than you would in say the middle of the day when it's just like a routine interaction and there are more options that are available to you. You might also be willing to pay more for the convenience of getting it taken to your house because well what's the opportunity cost of that? I have to go get in my car and drive several miles away to this restaurant and wait in line and do my order there now it's at my fingertips so you're actually paying for

Speaker 2

the recovered time and effort and energy that you would have put into going out to the restaurant to get it yourself by having that delivery. And it may look like, the fees are really high, but people are willing to do those fees for the convenience so they can recover that opportunity cost that would have been consumed and taken up by hopping in the car and driving down the road to the store. Yeah, you always have to weigh the cost of putting on a pair of pants in order to go do something. It's like, is it going to be worth it? Yeah. If anybody's been to like Manhattan in particular, there are all these delivery guys on e-bikes just kind of. weaving in and out. The streets. Either they're driving, weaving in and out, doing death defying things on their e-bikes, or they're kind of like camped out in like these, you groups. I mean, they kind of look like hell's angels, but for food delivery. And, you know, I just wonder, more and more people just staying in and ordering in than ever before? It seems that way. The convenience, the fact that we have innovated in our economy where you click a few buttons on your cell phone and then pizza arrives. You click a few more buttons and then burgers arrive. You click another button and there's a grocery delivery service. It's just kind of implicit in there. We've eased aspects of the transaction of actually having to go out to the store or go out to the restaurant to fulfill this need, this purchase by bringing in a middleman and you're paying for the

Speaker 2

middleman, but it's a classic demonstration. of marginal value theory, the notion that it's the actual moment of the exchange that determines its circumstance and what you're willing to pay and what somebody else is willing to offer it for. Now, there have been times, say like peak hour on New Year's Eve is a really bad time to order delivery service because there's a surcharge on the delivery. It's in high demand. Everyone's ordering pizza for their New Year's Eve parties. And you'll look on that on the app and sometimes that surcharge will appear or the wait time appears and you may decide, well, I'm not going to do this. I'm just going to cook something myself or I'm going to go out to the store and pick it up myself. Other times, the apps will actually offer a discount. for, yeah, maybe you get a two for one price on burgers or you get a 10 % off. And these things pop up in really seamlessly integrated ways. Well, what that's doing, that's the app telling you that there's not a surge of delivery demand right now and we're trying to continue to make money. essentially. So they'll offer you that little extra incentive in the off hour to order something and that keeps their drivers employed. That also keeps the restaurants happy because they're not in a surge period and they can still continue to do transactions. So it's really kind of smoothing out the business day on both ends. Both the consumer that needs and wants something at unusual hours that otherwise would not have been available to them and then the restaurant or the grocery store or whoever's selling the service that gets delivered also has

Speaker 2

a more continuous stream of economic activity, a customer base, another hour. And I just want to put this message out there. If you were listening right now to happy hour econ, we expect you to tip 20 % in lieu of In lieu of a fiat currency or crypto. If you sent this to 20 % of your friends to listen to, it would go a really long way. Something that I'm really interested in is tipping as a kind of cultural artifact and We take cryptocurrency? Yeah.

Speaker 1

It seems like I've done some traveling around the world. seems like tipping is really like an American thing. seems like the rest of the world are horrified when they actually come and visit and they're expected to take part in the American culture of tipping. That's the interesting thing because the United States is really kind of a latecomer to the tipping game. Although, you know, we're part of the new world. And I mean, by latecomer, I mean, this developed in the 1800s in the United States. Whereas we have records, it was continental Europe going back to like the Middle Ages. There are old epic poems that talk about tipping your minstrel for singing a song. There are Shakespearean plays that mention tipping as a way to basically reward the person in the court that served you. So this is an ancient custom, it's an ancient tradition, it emerged organically, and I would argue it emerged with the development of a proto-capitalistic economy. The idea here being that you can use money as a way to send a signal, it's a way to send information of your approval of the service that's been rendered. And it's also a way, as the service provider, to do something extra and get that extra reward. So this is a well-documented part of history. It goes back to the Middle Ages in Europe, that you tip the person that you served, that served you. And there were entire books of etiquette that developed around this. You you look at travelogues and guides that were written in the 1700s, and they would have... lists of advice for like a gentleman. If you go to this country, this is what you're supposed to tip the person that, the coachman that delivered you to the inn. This is what you're supposed to tip the bellman that carried your bags. These are the local customs that emerged. And this was a sign of, you know, is referred to as a gratuity. Gratuity, the roots of the word being thank you, is a way of conveying respect for the service that's rendered. But it also incentivizes the service provider to do something

Speaker 2

extra. And you had this custom that emerged really in the 1700s and 1800s in Europe where there are recorded instances. Mark Twain writes about this when he travels the world as this famous author. There are recorded instances of really high-end hotels that had service staff that did not even get a salary from the hotel itself. In fact, they paid kind of a rental arrangement to the hotel to be the official porter or the official greeter or the official person in the lobby, the concierge effectively, and they relied on tipping income. And I think Twain actually mentions in this, in one of his books that he had visited a famous top-end hotel. I think it might've been in Berlin and Germany at the time. And the chief, essentially what we would call a concierge today, that's making sure everything happens, had been through this competitive process to take the job. And he made the equivalent of $1,000 more per year than would have been the case if he was a wage laborer. receiving that money from the hotel, all through tipping, all through service of the customers that came through there. So you really had this history that emerged. And when you had Americans going abroad, they saw the old world as like signs of civilization, and they brought this culture across the Atlantic with them as we started to develop cities. So tipping emerges in New York and Philadelphia, and really the developed cities of the East. And as we start to settle the continent, this custom spreads. Now, something flipped in the 20th century. Whereas tipping culture became widespread in the United States as just this economic mechanism of easing the transaction, showing respect to the person that provided you service. Whereas the service industry in Europe moved away from these price signaling mechanisms and toward more of a formulaic, like labor union style form of employment. like, this is the wage that you make if you're a waiter. This is the wage you make as a bartender. You don't get tipped and all bartenders

Speaker 2

get the same, all waiters get the same, all bellmen get the same. It's a fixed wage system. So there's no means of differentiation between them. And I'd argue that's economically less efficient because you can no longer offer better service and get a reward for that better service. One of the criticisms I often hear for people who are against tipping, which I often think are just ways of cheap people to kind of justify. Yeah. you'll often hear them say, well, If the waiter or the bartender was paid a higher hourly wage, then I wouldn't have to tip. their employer wasn't basically stealing from them and giving them more money, I wouldn't have to tip. But everyone I know who's worked as a server or a bartender, they actually prefer the deal that they get there because they can rely on tips. And there are survey data that show this. they ask out of the bartender and the waiter and the service industry, you ask people, they routinely answer in the United States, yes, we prefer the tips. And what it essentially means is you as the service worker, you have some control over your income stream. There have been studies that compare tipping industries versus non-tipped wage labor industries, and it's actually the tipping industries that make well above minimum wage. But if you think about this, if you're a socialist, if you're someone who operates on the labor theory of value, the notion that every person does the exact same job and should get the exact same wage for it.

Speaker 2

There's no product differentiation. There's no incentive mechanism. You really like things like minimum wages. And well, what do minimum wages do? They raise the wage for the worst performing employees, but they lower the wage for the best performing employees. Those that went above and beyond to earn that extra tip no longer have an incentive. It's just like do the bare minimum of your job and you're going to get paid the same thing regardless. And then everything's like the DMV again. in the day, shortly after college, I was a waiter in a Thai fusion restaurant in the meatpacking district in Manhattan. And just to really paint the picture, I had a ponytail at the time. had a black it was so dark. It was so ponytail. It was like Steven Seagal. Without without the keto. Yeah. And it was funny. It was a Thai fusion restaurant. And I was like one of the only like non Thai guys. who work there, so like the whole staff was Thai. So I guess, in a way, I was like an exotic creature in a way working. And so when I would wait tables, I have to admit, I did pretty well. They would often have me waiting on larger parties and that sort of thing, because I had a little gift for Gab and whatnot. And I would see, The under siege thing.

Speaker 1

the check being paid and I would look and see how much I got, you know, in the tip and I'm like, man, tonight's gonna be, this is a great night. But we all pooled the tips. So then, you know, as good as I was that night, it was then split among, you know, everybody else and it was like, okay. And then meanwhile, the bartenders, like they got to like kind of keep their own tips. Exactly.

Speaker 2

Yeah, it's different incentive structure. Yeah, was a weird, yeah, now that I think about it, I got to go back there and talk to them about that because because we would have to give a portion of our tips to the bartenders and the bartenders didn't have to give a portion. sure anything there. They're running up the booze bill and meanwhile the waiter, the guy in the back that's like spilling drinks and everybody's getting the same share that the person that's doing excellent service. So it just takes the incentive out of it. Well takes the individualism out of it. I would guess that if like say you're a really pretty gal and you're a bartender, guys are probably going to throw you more tips than you know if I was doing. If me and my gorgeous ponytail would get. It's so interesting with you know tipping culture you know going from this sort of like global thing and then switching to now it's like an American thing and I guess if you're watching TikTok videos enough, someone will try to convince you that tipping in the United States is related to racism and slavery. Right. It never made any sense to me and Phil, you've actually written about this. So maybe you can expound on that.

Speaker 2

Yeah, so this was really kind of a narrative that took off in the past 10 years, this notion that tipping is a derivative of a racist culture after the Civil War. They never really explain how, but it was popularized by this book called Forked by Saru Jaromayan, who published this, think, in the mid 2010s. And she's a minimum wage activist. And that's the key thing to understand here. This isn't a scholar. This is a minimum wage activist. like they want to raise the wage, the return that's provided to every person in the service industry. Go back with another thing. This is the warmth of collectivism by squeezing out the frigidity of tipping individualism. raising wages for everybody across the industry, but you remove tipping, and that means people that are exceptionally good at their jobs that are getting that extra bonus are now squeezed out of the industry and reduced in wage down to that minimum wage. Well, they built up this narrative that said that American tipping culture wasn't the norm until it was imported, and it was only imported after the Civil War, supposedly, as a way to underpay ex-slaves. And I dug into the history of this and first off, I can find no evidence of it whatsoever. And in fact, it's the alternative that's the real story here. The minimum wage itself comes about in the segregation era as a favored device to keep African-Americans out of competition with poor white laborers and especially in the Southern States. And if you think about it, you you're economically marginalized, you're in a discriminatory society, the Jim Crow era South where segregation is the norm, and say you're an African American, well, what's one way that you have economically to get ahead?

Speaker 2

is to be really good at your job, to provide better service, to provide better products, to do something that differentiates yourself economically, and then the individual customer to that transaction will pay you more and reward it. It's basically the market erodes away at racism. And this was the great insight of Gary Becker, Nobel Prize winning economist, is market mechanisms, when they're left unimpeded, create value that erodes away at racist institutions. So that was happening in the South. entrepreneurial African Americans who were otherwise excluded from society are providing better economic services and getting rewarded from it. Well, white laborers are like, well, now we have blacks that are competing against us. Well, what can we do? We're going to go to the government and lobby the government to impose minimum wages with the notion being in a segregated society, if you raise the minimum wage level on all employees, it's going to reduce the workforce. And who's going to get fired first? African Americans. Who's going to get squeezed out of the economy? African Americans. Furthermore, even some of the deep South States like Mississippi, they start banning laws, banning tipping itself with laws. In the early 20th century, there are recorded instances of segregated states saying that tipping itself is illegal. And this is a way of targeting African Americans who are circumventing minimum wages and other restrictions on the workforce by being entrepreneurial and taking advantage of the tipping system as a way to facilitate exchanges. So it's the exact opposite of this bizarre story that's emerged from the minimum wage activists. And we have clear evidence from that era that says outright racist institutions and racist figures of society were trying to African Americans out of the workforce to keep them out of competition with poor white wage laborers and thereby drive up the wages of poor whites at the expense of black people. And yet this narrative has just been completely inverted through what I would argue is junk history.

Speaker 1

It's pretty wild when you look back at the progressive era in particular, like how many Supreme Court cases and stuff and how much of the economy was kind of jerry-rigged in order to keep the outsiders out. Yeah, there's multiple of those cases, especially in the New Deal era. The lesson here is that markets are essentially, when they're allowed to function, they're functionally colorblind. It's a transaction between two people that probably don't know each other at that initial exchange between them. I mean, it's a random person that comes into my shop. And if you think about it, the logic here, if the government steps in and says, well, black people are not allowed to shop here, or this type of bakery can only be open during these hours, or employees can only do a maximum of 10 hours a day, you're putting a restriction on economic transactions by the instruments of the state. And in so doing, you are reducing the availability of choice between both the producer and the consumer, the service provider and the person that receives that service. Their choice is now constricted. Well, constrictions of choice also service things, service mechanisms to exclude disliked people, marginalized people that society or the majority in society is deemed unworthy to participate in that economic exchange. discriminatory society restrict the economic activities of the disliked group. And it's an age old tool of the government. You get the state to come in there and enforce it. think about this like segregated lunch counters at Woolworth. Woolworth did not want this as a national policy. It's imposed upon them by the locals and state segregated governments. Why wouldn't they want it as a national policy? Well, that means you're essentially telling the public, it's like you cannot sell lunch

Speaker 2

to people because of their skin color. That means you're reducing your customer base. If you open up to a broader customer base, you make more money, regardless of their skin color. If you tell black people they cannot stay at certain hotels because they're segregated hotels reserved for white people, that means you have fewer customers coming through your hotel base. And if you use the government to enforce that, to put restrictions on the market, You know, you're effectively distorting the economic exchange that would otherwise occur voluntarily between people of multiple races, backgrounds, ethnicities, religions, whatever, because the market really doesn't care about that type of characteristic. The market is about facilitating the good, facilitating the service and the transaction. Where do you see tipping culture moving forward? in the United States? think Europe is lost. Europe is gone. And you notice that if you travel and you're up, I mean, I know this is anecdotal, but so tipping is much less common. But the service is also more lackadaisical. mean, you you go to a restaurant and you'll get waited on, but it'll be like hours of sitting there, piddling around in the kitchen before someone delivers your food. There's no real mechanism or an incentive for efficiency that's offered. But it's also, and you get the exception, if you have a really good waiter, and I've done this, I'm tipped in Europe, they're shocked by it.

Speaker 2

And they're surprised. And I was over, I think in Scotland last year, and I tipped, I had a really good bartender. I was at the hotel and I tipped him well that night. And then the next night when I come back, they were thrilled. Hey, the same guy that's staying at the hotel was back. So it is rewarded and it's a way of sending that signal, that mechanism of both on the service provider and the person, the paying customer of, know, there's approval of the transaction and there's betterment of the transaction between. It's created a social bond now. So I see this as something that's valuable with US culture that we want to keep and retain. Now there are risks associated, know, as we were discussing earlier, the expecting a tip built in your credit card because you pulled the doughnut out of the counter and stuck it in a bag. I think that erodes at some of the more important and substantive tipping interactions when you actually have a waiter or a bartender or a bellman or someone that's actually doing work for for that service. I've turned into basically an elderly man. For those of you who don't see me, just hear my voice. Yeah, technically I'm a 43 year old guy, but I respond like an old man anytime somebody does a good job. Like maybe I'm just not used to people taking pride in their work or just providing a service well. But anytime I go out to a restaurant and a waiter is excellent at their job, I tell the manager, And it's sort of like this perfunctory idea of just like everybody gets tipped. does take away from that where it's like, no, no, there are people who are actually really special and they should be rewarded and they should be rewarded. They should be rewarded more than the people who are just, you know, sitting there just expecting.

Speaker 2

Yeah, exactly, exactly. It's a feedback loop. It's a mechanism. again, it's an opportunity. You as a service industry worker, if I'm in that situation, it's a way to differentiate my job, my product, my service that I'm offering from everybody else. And in so doing, if I've got an incentive, I'm going to get a higher tip if I provide better service, if I fulfill this customer's request for how my food is prepared or how my cocktail is made or whatever they're needing at that moment. If I'm going to get some sort of reward out of that, well, I'm going to do a better job, but I'm also going to get paid more. It's a way for me to move well above and beyond minimum wage. And that's why service industry workers, if you actually ask them, they like the tipping culture. It gives them some control over their own job and their own destiny of what they do. And with that, I've heard talk of legislation. don't know if it passed, but this idea of no longer taxing tips. Yeah, so the One Big Beautiful Bill Act had a component, and it's only up to a certain amount. And the IRS is all implementing this, so get ready for your income taxes in a couple months. April 15th's around the corner. But there is a new tax exemption that's been put in place for tips up to a certain amount and in certain categories to remove them from that penalty. And in the one sense, it's a political gimmick.

Speaker 2

Yeah, this is clearly, it's going to create popularity in the service industry and especially states that have heavy service industry. So it's urban areas, also Las Vegas, Nevada was a big tipping culture that was there. So yeah, there's an electoral ploy component to it. But also I look at this from the perspective of, know, taxes in general are bad. They're drags on the economy. They take money out of productive circulation and they put it into the government coffers where it's spent on. waste, fraud and abuse and all the terrible things that bureaucracies do. So giving this type of a tax incentive, keeps a little bit more of that money in the private sector's hand. It's going to be put to better uses than anything the government can do with it. Thank you so much for listening to this episode of Happy Hour Econ. Again, if you have the means, please tip by sharing, subscribing, and talking up how much you love Happy Hour Econ. We'll see you next week.