Emmer: Cutting Wages of Tipped Employees Doesn't Cut Their Wages

Tom Emmer's got some 'splaining to do about his proposal to cut the wages of 22,000 Minnesotans who earn a minimum wage and tips. His proposal to institute a tip penalty (h/t MAK's response to Emmer's position) has come in for all kinds of criticism. Leave it to his crack campaign staff to explain it away. Emmer sent an email explaining his position:

When a reporter asked if I supported the concept of a tip credit, I answered yes. I want the wait staff at a restaurant to be successful and make as much as they can, and a recent study published in Applied Economics Letters shows that tip credits have essentially no negative impact on wages for tipped employees. So contrary to what some people are saying, I have no interest in “cutting wages.”

So let's find this citation. This is also the ONE source that economist and right blogger King Banaian could scrounge up to support his buddy Emmer's position. Basing a change in public policy on one and only one three-page mini-study is bad policy making. Remember, these are the same people who dispute the legitimacy of the IPCC's conclusions on global climate change!

This three-page article purports to prove that

"for the most part, servers in those states with higher tipped minimum wages appear to have no income advantage over servers elsewhere. States with policies designed to boost the incomes of servers, often the lowest paid occupations, will find that those policies are generally ineffective."

While it is nice to see the Emmer camp citing an article that directly contradicts his assertion that tipped employees are getting rich while business owners suffer, this study fails on many levels.

Off the top, Minnesota was one of the (Category 5) states using the 1999 data that DID show higher wages for servers (!):

. . .the sample selection estimates indicate that only workers in Category 5 states are paid a small premium relative to workers in states where there are no minimum wage laws.

I'll be clear, I'm no economist, and I do not understand the intricacies of the modeling that Professors Bodvarsson and Anderson used to "prove this hypothesis," but I do know how to read what hypothesis they set out to prove. And here it is from page 1 of their article:

Do servers earn more in states with higher tipped minimum wages? We hypothesize no ceteris paribus premium to such servers. The reason is that the national market for servers is very competitive and we contend that it will equalize pay between states. Servers in states with lower tipped minimum wages may migrate to states with higher wages, or businesses in states with higher tipped minimum wages may relocate to states with lower wages. The resulting adjustments in server demand and supply will dissipate any interstate ceteris paribus differences in pay. We test this hypothesis using 1999 state-level data on hourly compensation of waitpersons and bartenders.

This is important. On its face, the imposition of a tip penalty where servers and bartenders pay the first 3-5 dollars of each hours to their employer, will directly reduce employee pay. Anderson and Bodvarsson's argument is that this direct effect of reducing wages is scrubbed out by other indirect market forces. But their hypothesis is ridiculous. It assumes that labor and businesses are perfectly mobile, and that they act in a "rational" manner, relocating nationally to maximize their pay (in the case of labor) or minimize their labor costs (in the case of restaurants.) Nice theory . . . no, that is a TERRIBLE theory.

As some of the lowest income occupations, servers and bartenders are less mobile than the average person. And the average person isn't perfectly mobile either. Family, school, friends, being underwater on your house, etc. are all factors that constrain movement. Same with the small business owners that Emmer purports to champion. This hypothesis assumes that all restaurants can and will pick up and move anywhere in the U.S. The Eagle Street Grille's location next to the X is a huge contributor to their bottom-line, but this hypothesis proposes that they will move to Iowa if labor costs are lower there.

And let's be clear - the remedy for employees whose wages are cut is to move to another state. Thanks a lot for that.

King Banaian makes another weak attempt at an explanation:

I'd note one other possibility from the minimum wage discussion that is often called the Wessels effect or Wessels-McKenzie-Tullock effect: The tip credit or lack thereof is compensated by decreasing fringe benefits and conditions of employment. As Tyler Cowen noted back in 2004, Tullock argues that "the government can make an employer raise nominal money wages, but can't stop him from turning off the air conditioner." The same may apply to servers, whose work conditions can vary widely from restaurant to restaurant.

Once again, the assumptions made to prove the hypothesis are ludicrous. First, service employees have few fringe benefits to begin with, with health insurance and retirement benefits a distant mirage for many. Second, this would have to work in reverse in this case since Minnesota does not have a tip penalty now. What Banaian is arguing here is that if tipped employees were paid LESS, their employers would make up for it by giving them MORE fringe benefits.

Yeah, right. And this is the best "proof" that the Emmer team can come up with to "prove" that cutting worker's wages doesn't reduce worker's wages?

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