The Economics of Tipping

For many people, the decision to tip involves a combination of fear and social norms. Technology has amplified those feelings over the past few years.

Jul 15, 2024

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Few topics spark as much passionate debate as tipping. Whether it’s at the dinner table or in the comment section of social media posts, people have strong opinions on how much and which workers should and shouldn’t receive tips. Honestly, people just seem fatigued at this point. As a result, Americans are tipping less despite growing requests for more gratuities. One man has personally taken the trend to the limit and has gone viral for not tipping at all, regardless of the occasion.

He’s flipped the script on this common practice and gained notoriety for refusing to tip at restaurants and bars across Los Angeles. He goes by the username @zerodollarstip on Instagram and @idonttip on TikTok. He’s armed with a smartphone, a rebellious spirit, and an extra $300 in his bank account over the past two weeks by not tipping. He’s Mr. Pink from Reservoir Dogs, but 32 years later.

He may be the social media’s latest villain, but why are his actions so fascinating to so many people? Tipping isn’t just about leaving a few extra dollars for good service. It’s an interesting connection between broader economic principles and societal norms. Let’s peel back a few of the layers of this practice and examine how technology and social norms influence the outcomes for workers and businesses alike.

The Fear Factor: Tipping and Consumer Behavior

Tipping in the United States has a troubled history dating to racial oppression associated with the post-Civil War Reconstruction period. It has since grown to become a social norm intended to show gratitude for good service. You leave a tip at the end of your meal or service experience, rewarding the waiter, barista, or driver for a job well done. The incentive seems obvious enough: provide excellent service and you’d likely receive a generous tip when it was all over. Unfortunately, empirical evidence suggests that tips are hardly affected by the quality of service.

Tipping after receiving a service is still common in most sit-down restaurants and hair salons, but technology has changed this dynamic for other industries. Point-of-sale systems and online ordering have shifted the tipping decision from the end to the beginning of the transaction for many services. This shift introduces a new, less pleasant incentive for the customer: the fear of getting bad service or a poor product if you don’t tip upfront. It’s a significant change from the social norm we have grown to associate with tipping.

Take DoorDash, for example. They have even experimented with a feature that warns customers their orders might take longer if they don’t tip in advance. The new message is clear: tip upfront, or risk your food arriving cold. This tactic preys on customers’ fears, pushing them to tip preemptively to ensure prompt service.

Similarly, when you’re at a coffee shop and the barista flips the point-of-sale terminal toward you, prompting you to tip before you’ve even taken a sip of your coffee, it creates a pressure-filled environment. The presence of the service provider, watching as you decide whether to tip, compels many to add a gratuity out of a sense of obligation or fear of seeming stingy.

Technology's Role in Tipflation

Technology has also led to what some people are calling "tipflation." Digital payment systems have transformed how we tip, leveraging principles of behavioral economics to subtly influence our decisions. Let’s go back to that coffee shop for a brief moment. When it’s time to pay, the screen presents you with three tipping options: 15%, 20%, and 25%. Behavioral economics tells us that when presented with such options, many people tend to choose the middle one, even if it’s higher than what they would normally tip. This framing effect sets an expectation that these are the appropriate values, nudging consumers towards higher tipping percentages.

This phenomenon extends beyond coffee shops. Businesses now use sophisticated point-of-sale terminals with default tipping options, often starting at higher percentages than people are used to. This technology-aided tipflation means consumers are tipping more frequently and at higher rates, even in contexts where tipping was previously uncommon, like self-checkout terminals.

What’s fascinating here is the subtle shift in power dynamics. Traditionally, customers held the power to reward good service with a tip. But now, technology nudges consumers towards tipping before they even receive the service. This preemptive tipping raises important questions: Is it fair to pressure consumers into tipping more? And does this change the effectiveness of tips as a motivator for high-quality service?

Our anonymous no-tip influencer brings these issues to the forefront, challenging the norms and expectations that digital payment systems reinforce. By refusing to tip, this influencer forces us to consider whether our tipping practices are being shaped more by technological nudges than by genuine appreciation for good service.

The Impact on Workers and Businesses

But how does tipping affect workers and businesses? Let’s start with the workers first. In some states, tipped workers can be paid as little as $2.13 per hour, relying heavily on tips to make up the difference. This variability in income can create financial instability for workers, especially when tips fluctuate based on factors beyond their control, like seasonality, economic downturns, or simply the mood of the customer.

The tipping system also opens the door to gender and racial discrimination. Studies have shown that black servers often receive lower tips than their white counterparts, despite providing the same level of service. When it comes to ride share drivers, Uber economists have found that men female drivers are tipped 10-12% more than male drivers. This systemic bias adds another layer of financial insecurity and unfairness for many workers in the service industry.

For businesses, tipping has traditionally been a way to keep menu prices lower while relying on customers to supplement workers’ income. As tipping norms and expectations evolve, businesses face a delicate balance. They have to figure out a way to provide fair compensation to their employees and keep their customers happy.

Some restaurants have tried to move away from the tipping model altogether, opting to pay servers a salary and informing customers that tipping is not expected. This model, more common elsewhere in the world, aims to provide more stable and predictable income for workers. It also seeks to eliminate the power imbalance and pressure associated with tipping. The transition away from tipping requires careful communication, but it holds the promise of more stable future for service workers.

Final Thoughts: The Future of Tipping

As social norms evolve, so too will the practice of tipping. While some may long for the "graciousness" of traditional tipping, it’s clear that the economics of tipping are in flux. I believe most us can agree that there service workers should receive a fair and effective compensation for their work. The challenge is determining a method that we can all agree on, which is much more unlikely.

Whether you’re a generous tipper, a reluctant one, or somewhere in between, the hidden economics of tipping reveal an interesting side of our motivations and behavior, and ultimatley their consequences. The Zero Dollars Tip phenomenon allows us a few moments to reexamine our tipping practices and the broader economic issues invovled. As we grapple with these changes, one thing is certain: the debate over tipping is far from over.