New Analysis: Eliminating Tipped Wage Rate Would Kill Opportunities for Waiters and Waitresses in Illinois

Research Finds More Than 20,000 Full-Time Equivalent Jobs Would Be Lost With Sen. Lightford’s Proposal
  • Publication Date: May 2012

  • Topics: Minimum Wage

WASHINGTON – Today, the Employment Policies Institute (EPI) released a new analysis of Illinois S.1565, a bill introduced by Sen. Kimberly Lightford, which raises the state minimum wage and eliminates the separate rate for employees who earn tip income. The wage for tipped employees would rise from $4.95 to $8.90 an hour in the first year of this proposal—a nearly 80 percent increase.

Economists William Even of Miami University and David Macpherson of Trinity University estimate that eliminating the Illinois tipped wage rate would result in the loss of more than 20,000 full-time-equivalent tipped jobs in the Illinois restaurant industry.

“Restaurants only keep about 3 cents in profit for each dollar in food sales, and every increase in labor costs has to be offset elsewhere when cost-conscious customers aren’t willing to pay higher prices,” said Michael Saltsman, research fellow at EPI. “This analysis shows how those offsets will translate to fewer hours and fewer jobs for tipped employees in Illinois.”

The Illinois analysis is available here: http://www.minimumwage.com/wp-content/uploads/2012/05/120508_EPI_PolicyBrief_ImpactofEliminatingTipCreditIllinois.pdf, and the economists’ full report is available here: http://epionline.org/study_detail.cfm?sid=140.

Recent Census Bureau data show that tipped restaurant employees (including servers, bartenders and bussers) average over $11 an hour when tips are included, with some earning $24 an hour or more. Labor law permits employers to pay a base wage of $2.13 an hour, so long as the employee earns at least the federal minimum wage of $7.25 when tips are included.
(In Illinois, the tip wage rate is higher than the federal rate, calculated as 60 percent of the state minimum wage of $8.25 per hour.)

Seven states don’t allow employers to take a credit for tip income. Drs. Even and Macpherson found that each 10 percent increase in the wage rate for tipped employee reduces their hours worked by more than 5 percent.

“Recent polling data show that the vast majority of Americans tip 15 percent of the check or more for good service,” Saltsman continued. “These gratuities are what allow hard-working waiters and waitresses to earn an hourly wage that’s well above the minimum.”
Saltsman concluded: “This research confirms that attempts to eliminate the tipped wage rate in Illinois aren’t only unnecessary, they’re harmful.”