Freakonomics Radio - 129. Should Tipping be Banned?

Episode Date: June 3, 2013

It's awkward, random, confusing -- and probably discriminatory too.

Hey, Levitt. Hey, Dubner. When I say the word tipping, what do you think of? I think of discomfort. Discomfort for whom? Oh, for the tipper, for me. I don't like to tip. Tipping's unpleasant.

Now, it's not that you're an ungenerous person. I find you quite generous. I just don't like social interactions that much. And I don't like the idea that I'm not sure how much to tip or what's fair or what's right. And it leads me in the exact opposite direction. Whenever there's someone who's doing a job that deserves to be tipped or that socially we think should be tipped, it's always my inclination to not let them do their job. So I always want to carry my own bags in airports or in hotels. And obviously, I can't serve my own food at the restaurant.

But if I could, I'd go right in the kitchen and make my own food. Can I say something about you? Sure, Leva, go ahead. So I always thought I was a good tipper until I hung out with Dubner. Man, you throw the money around like it's going out of style. It's embarrassing to be around you. It's so embarrassing.

Oh man, we get in some car, some sedan to take us 15 minutes from one place to the next and you're flashing 20s and 50s and stuff like that. From WNYC and APM, American Public Media, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner. So Steve Levitt, my Freakonomics friend and co-author, thinks I am a grotesque tipper. For the record, I believe he's exaggerating. But yes, I do routinely tip people who work hard for a living, especially when they're not getting paid all that well. That said, I agree with Leavitt that tipping can lead to discomfort, can be confusing.

Why do you tip a hotel doorman but not the person behind the reception desk? Why do you tip a baggage handler at the airport but not the flight attendant? How much is enough for a tip? How much is too much? And if you're on the receiving end, how do you get the biggest tips? This is a question that everybody has an opinion about. We talk to people all over the country who work for tips. My name is Tanya.

I'm a server, and I'm in Minneapolis, Minnesota. I'm Johnny Glawe, and I'm a valet. Krista Olesen. I've been bartending for over a decade. I'm a barista. Coffee barista. I am a server. Server. I'm a server at Danny's.

I'm a hairstylist. I'm a barber at Haleem's Haberdashery. I've worked many jobs for, as a barista, as a bartender, and as a doorman. My name is Iris Green, and I'm a stripper. You know what's really interesting is if you see somebody smoking, they're usually going to be a good tipper. The older, the fatter, the better. You can get a guy that looks like a bum and turns out to be a super guy, and you get a guy that looks like a millionaire and turns out to be a super guy, and you get a guy that looks like a millionaire, and he won't tip you a thing, you know. Black card holders from the American Express, 10 to 15 percent.

I understand you got rich by being frugal, but that doesn't fly. And look at their shoes. The shoes? The shoes. Shoes can say a lot. Tipping is an idea that economists traditionally have a hard time with. Why should I give more of my money to someone else on top of what I've already paid for a meal or a ride to the airport? And what is a tip exactly? A fee?

A tax? Is it altruism? We needed to find someone who could answer all of our tipping questions. My name is Mike Lynn. I'm a professor at the Cornell Hotel School. I do research mostly on tipping behavior. There you go. Why does Michael Lynn find tipping so interesting?

In his words, it's, quote, not only because it is widespread, but also because it is an expense that consumers are free to avoid. And how big is this expense? I haven't done it recently with the most up-to-date records, but approximately $40 billion a year is tipped in the United States. 40, four zero, $40 billion a year. Yes. Holy cow. I'm clicking around here. I see that the budget for NASA is under $20 billion. So we could build two NASAs for tipping. So that's a pretty astonishingly large amount of money for what is essentially a voluntary financial transaction, yes?

I think so, yeah. Lynn has written 51 papers on tipping behavior. Here's one title. Are Christian-slash-religious people poor tippers? The answer to that is yes, relatively speaking. Here's another paper. Sweetening the till, the use of candy to increase restaurant tipping. Yes, Michael Lynn found that candy correlates with higher tips.

As you can probably sense by now, Lynn has studied all sorts of factors that may or may not influence tipping. If we could, we could almost do this as a sort of a lightning round if you're comfortable giving short answers. Talk to me about how tipping varies based on the following factors. Let's start with attractiveness of the server. Attractive waitresses get better tips than less attractive waitresses. Men's appearance, not so important. Okay. And what about a waitress versus a waiter generally?

Hard to say. In general, I would say waiters get better tips from women than men. Waitresses get better tips from men than women. And what about, let's say among women, hair color? Blonde is better than brunette or red or no? Yes. Blondes get better tips than brunettes. Slender women get better tips than heavier women. Large-breasted women get better tips than smaller-breasted women. Surprisingly, at least in the studies I've done, women in their 30s get better tips than either younger or older women. So a skinny, good-looking, big-breasted woman in her 30s is going to get big tips.

I would simply replace the word skinny with slender. Slender. A slender, good-looking, big-breasted woman in her 30s gets big tips. Color me shocked, I have to say. Yes. I have tried using my feminine wiles before with mixed results. When I really made an effort at that, it tended to work. You know, you just flash your smile and you make sure your hair and your makeup is done, even if you're sweating like a pig.

As long as your hair and makeup's done, you'll be all right. I pretended to be French for a while, and I put on this accent like this, and I said I was from France, and I have been in New York for, I don't know, six months, and I love it, but it got so tiring now. I was exhausted. It worked, though. So how does Michael Lynn know what he knows? Well, he's studied tipping since he was a grad student.

The first study I did on tipping was outside of an IHOP. Then as now, he looks for as much data as he can get. Even today, he'll still stand outside a restaurant interviewing customers as they leave. Asking them questions about their perceptions of the dining experience, how much their bill was, how much they tipped. Some of it is having servers keep records of their customers, including their bill size, tip amount, and race. But a lot of it is either online or telephone interviews with customers asking about their general habit, you know, tipping habits and tendencies. He focuses on restaurant servers, since they take in about 70% of all tips in the U.S. The server-customer relationship begins the minute you sit down.

Introduce yourself by name, not in some remote, mechanical kind of way that says, hi, I'm Mike, I'll be your server. But if you can genuinely have a conversation with that table and as a part of that, you know, introduce yourself by name, that's good. Well, let's hear you introduce yourself the right way because the way you just said it is the way I hear it a lot. And I have to say it doesn't make me want to cozy up and dump a 20 in his pocket. That's true. Please understand, I'm no longer a waiter.

The reason I didn't get good tips when I was a waiter is I'm not the most sociable of people, so I'm not sure I can do it right. I'm sure you – come on. But I think that if you go up to a table and go, hi, my name's Mike. I'm going to be – no, see, it's starting to sound mechanical. I don't know how you do it, especially if you're having to do it over and over again without being mechanical. So that's interesting. Even the tipping sage cannot master the game. This is a complicated art.

No? What else? What are the other habits or traits or tricks that a server can do generally to increase? You said a little bit of a touch is good. I'm guessing a lot of a touch is not so good. Although I did do one study where I had a server touch customers and either count 1-1000, 2-1000, remove his hand, or touch and count 1-1000, 2-1000, 3-1000, 4-1000, and then remove his hand. Obviously, the counting was meant to be silent. But the point is that four seconds actually seems like

a long time. And it turns out that he got higher tips in both conditions. It didn't matter how long, as long as he touched. As long as there's a touch, yeah. And where was he touching them? On the shoulder when he went to deliver the check at the end of the meal. I mean, particularly, it depends on the job. But at this job, yeah, I definitely touch people on the shoulder. Often when there's a big party and I need to lean in, I'll just tap them on the shoulder and be like, hey. My boyfriend, he was also a server. We worked together for many years at the same place.

He would bend down, you know. But I always thought that was a weird thing to do as a girl. I don't know. I've never been one of those people that does, you know, that like tried leaning down and talking to people or touching people. I just could never quite get into that rhythm. If I'm gauging a client and he's much older and he wants to sort of make sure that you're okay and you're going in the right direction in your life and he's taking kind of a fatherly approach to you, at the end of a dance or at the end of a champagne room, you know, you might touch his shoulder and say, thank you, sweetie, and ask him if he wants to take care of you.

And always flash a really big smile. Because if you don't, you're not getting anything. What about, you know, sometimes a server will write the little note, you know, thanks or a smiley face or whatnot. Does that work? Yes. Smiley faces have been shown to increase tips of waitresses, not of waiters. Drawing other pictures like of a son increases tips.

Squatting down next to the table or pulling up a chair and sitting at the table if there's room will increase tips. And when they increase by how much are we talking? In one study, the server got a dollar more per table when he squatted down next to it. And it turns out this was one of my former students. I asked him, what do you do to get better tips? He goes, oh, well, I squat down. And I said, you really think that helps? His response was, sure, I know it does.

And I asked him if he'd be willing to test his theory. He said, sure. So he agreed to randomly assign his tables to conditions. He would squat or not squat. And sure enough, he was right. Those tables he did not squat at, he got a dollar less. So it cost him money to help me do this research. But I put him as an author on the paper. It's a small compensation.

So clearly, there are all sorts of little things that can nudge a tip up or down, but forget all those little things for a minute. What about the big issue? How good is the service? The conventional wisdom says that good service brings a good tip and vice versa. True? Not true, says Michael Lynn. First off, I've done a lot of research looking at the size of tip and how it relates to the customer's perceptions of service quality. And a consistent finding is that there is a relationship. People do tip more, the better the service they get. But that relationship is very weak. It's a correlation. The average correlation is 0.2. That means about 4% of the variability of the differences in the percentage

tips left by different dining parties can be explained by their service ratings. So, up front- It's astonishingly low, isn't it? Not just a little bit? Yes, it's astonishingly low. So, it's absolutely the case that tips are not as strongly related to service as you would expect. Absolutely, I believe that that's got to reduce the incentive value of tipping. Having said that, though, even though the actual relationship between tips and service is low, servers think there's a relationship, and that's enough to motivate them to deliver good service. That's surprising, isn't it? How weak the relationship is between service and tipping. On the other hand, maybe we shouldn't be so surprised.

It reminds me of some of the research on altruism. If you ask people why they give money to a certain cause, they'll talk about how meaningful the cause is. But if you look at the actual numbers, you see that the cause takes a backseat to who's doing the asking. Like Michael Lynn's research on tipping, it turns out that a pretty blonde woman has advantages collecting charity, too. So a lot of our behavior that we may think is because of reason X may actually have a lot more to do with reason Y. Coming up on Freakonomics Radio, an argument for why tipping is just bad. We found that even after controlling for these other things, we still find this positive relationship between tipping and corruption. And an argument for why tipping is really, really bad. It's discriminatory. I lost my job because my manager said that I didn't fit the look of the company or

like the restaurant. And so I don't know if it was because, you know, I'm a lot more curvier than the other girls or because my skin is darker. I don't know. This new manager, he was an asshole. From WNYC and APM American Public Media, this is Freakonomics Radio. Here's your host, Stephen Dubner. Michael Lynn is a scholar of tipping at Cornell. He's examined just about every little thing that can affect tips. Some of his most interesting research looks at how people of different racial and ethnic groups tip and get tipped. What can you tell us about race of the tipper? tips, tip and get tipped. What can you tell us about race of the tipper?

So there's – waiters talk about that certain racial and ethnic groups and I should say national groups always tip worse than others. What do you know about that? Matthew Feeney, Jr.: Blacks tip less than whites in this country. They're more likely to leave without tipping at all. If they do leave a tip, it's on average a smaller amount. They're more likely to be flat tippers and not tip a percentage of the bill. It's partially a little bit mediated by socioeconomic status. That is,

blacks also have lower educations and incomes in this country than whites, and people with higher incomes and educations tend to tip more. So that's part of the reason that blacks tip less, but it's only a tiny part. What's the other part? What do you know about why that is then? I can tell you it's not exclusively an issue of service discrimination because I find even controlling for the customer's perceptions of service quality, blacks tip less than whites. The most powerful explanation is that it is a difference in perceived injunctive and descriptive tipping norms. Ooh, I didn't understand that. All right.

An injunctive norm is a norm about what you should do. Okay. And a descriptive norm is a norm that describes what people do do. I see. Okay. What I found is that blacks in this country, only about a third of them, if you ask, how much are you expected to tip in a restaurant context? Only about a third of blacks will say, give an answer in the 15 to 20% range.

I see. And that compares how to whites? Two thirds of whites. Interesting. It makes sense that social norms vary from group to group, right? So I guess it's not so surprising in some way. That's right. It's not completely surprising. But what's surprising to me is knowledge of the injunctive norm explains only about a third of the black-white difference in tipping. When I include differences in descriptive norms, because I could know, oh, yeah, you're supposed to tip 15 percent, but nobody really does that, right? That would be being aware of the injunctive norm but having a different perception of what the descriptive norm is.

And it turns out that there's also a black-white difference in perceptions of what people do. If I take both of those perceptions of the injunctive and descriptive norms, I can account for about half of the black-white difference in tipping. What's beyond that? I'm stumped. I mean, I've tested everything I can think of. If any of the listeners have ideas, have them email me because I'm looking for areas to test next. All right.

That's fascinating. So, first of all, what is your email? WML3 at Cornell.edu. dot edu. They call me Jack Rabbit. They call me Jack Rabbit. I am an exotic dancer. My name is Yvette Morgan. And actually, I'm a host at a restaurant.

Basically because, I mean, I'm speaking for all blacks, but we have a mindset of the fact that whatever we're doing for that service, we're getting paid, so a tip is basically a gratuity, which is an extra. And then, I guess in other cultures, they see it as a form of income. I know, for example, when I talk to some people that I know that are white, you know, when it comes to restaurant tipping, they always presume the fact that, well, they don't make any money, so the tip is all they count on.

So they view it differently. It's your attitude. It's your attitude. I mean, I'm not saying that black people have bad attitudes, but if you don't, you know, you can make good tips if you have a good attitude. I don't care if you're black or white or whatever. If you have a bad attitude, you're not going to make good tips if you have a good attitude. I don't care if you're black or white or whatever. If you have a bad attitude, you're not going to make good tips. What about differences in tipping for black customers toward black versus white servers? Both groups, blacks and whites, will tip a white server more than a black server.

And that's even controlling for perceptions of service quality. So a black customer will tip a black server less than a black customer will tip a white server. All else being equal. Yes. So it's fascinating. What can you tell us about other racial or ethnic groups, Asians, Latinos, immigrants versus, you know, on and on? I'll take whatever you have. It's fascinating.

The data on other ethnic groups is more mixed. There are several studies finding that Hispanics tip less than whites, but there are studies showing no Hispanic white difference in tipping. I haven't yet teased apart what's going on. Why am I getting it sometimes and not others? And the same thing is true with Asians. I do have some studies showing that Asians tip less than whites, other studies showing that they do not. The one thing I can say for certain is that the Asian white difference, even when it does exist, is very fragile. That is, I can control for things like sex, education, income, and it disappears. The Hispanic white, when it exists, is often robust. I can control for education, income, and it's still there. But I don't find it as consistently as I find the black-white difference. With all groups, once you control for income, if you can, men versus women as customers, who tips more?

In general, there's no sex difference. Is that right? Yeah. And even the sex of server, sex of customer interaction that we talked about previously, it has been observed consistently enough for me to say it's a real effect, but it's not universal. You don't always find that effect either. I see. What about the age of the customer? Older customers tend to tip less. I don't always find that effect either. I see. What about the age of the customer? How do we see that?

Older customers tend to tip less. They're also more willing – they base their tips on service quality a little bit more than younger people. So let me – you obviously know so, so, obviously impossible because it arrives over a lot of time with a lot of people participating in it. What would you do? How would you make tipping more either sensible or directly related to the things that should be related to and so on? You know, I think I would outlaw it. You would. Yeah.

And it might be illegal as it is because of the race of server effect that we had previously discussed. You can make the argument that tipping is a condition of employment that has an adverse impact on a protected class. So it's discriminatory, you're saying? Peter Van Doren It's discriminatory. And the Supreme Court has ruled that even neutral business practices that are not intended to discriminate, if they have the effect of adversely impacting a protected class, are illegal. And so it's not inconceivable to me that there will be a class action lawsuit on the part of ethnic minority waiters and waitresses claiming discrimination in terms of employment. And it's conceivable that tipping might be declared illegal on that basis.

You're talking theoretically or is this a movement that actually exists? Oh, I know of no such lawsuit in existence. But it's – I've talked to – Not hard for you to imagine. It's not hard for me to imagine. I've talked to lawyers, including people who specialize in labor and employment law. And I've gotten mixed opinions. I mean some of those lawyers have said, no, the courts would never go there.

Others go, no, that is a reasonable theory of the law. That's plausible. I think it is plausible. My firm would take a good hard look at a case if a server came to us and made that complaint. Justin Swartz is a lawyer at Outen and Golden in New York City. He represents employees in class action discrimination cases. He sued some of the biggest restaurants in New York for shorting employees in class action discrimination cases. He's sued some of the biggest restaurants in New York for shorting employees on the tips they deserved. If his firm

were to take on a discrimination case like Michael Lynn has proposed, Swartz would pursue two lines of argument. First would be disparate impact analysis. The purpose of disparate impact analysis is to eliminate what the Supreme Court calls headwinds, policies that make it harder for racial minorities or other people in other protected classes to succeed. With disparate impact, you don't have to prove that discrimination is intentional. It's a proxy for discrimination. The idea is that if there's a disproportionate impact on a particular group, here it would be African-American or non-white servers, then the plaintiffs have made the first showing that they need to make in their case. And the second argument?

The second step then is the employer's burden. Meaning it's up to the employer to prove that tipping is a business necessity, not a custom, but a necessity. Let's say I'm a restaurateur and I come to you and I say, look, I know what you do. I know who you represent. And I want to avoid unfairness. And I also want my business to prosper. So let's say I calculate the average tips in my restaurant and it's 20%. And I hate the fact that wait staff member A earns 50% more than wait staff worker Z because wait staff worker A happens to have these attributes that for whatever reason get a lot of tips. Pooling is complicated for whatever reason. Let's just say I don't want to deal with all that complication. So I'm just going to say on my menu to my clientele, we're getting rid of tipping because it's inefficient, sloppy, and potentially discriminatory.

Average tips here were about 20%. And therefore, we're just going to ban tipping and instead raise our prices 20%. I don't see any problem with that from a labor law perspective. And in fact, that might be the best way for restaurants to insulate themselves from liability. Now, you may know that some restaurants in the U.S. have already eliminated tipping. They use an automatic service charge instead. If customers want to, they can tip on top of that service charge. One restaurant in San Diego called The Linkery has gone so far as to ban tipping. If you leave extra money on top of The Linkery's 18% service charge, that money will be given to charity.

Jay Porter owns The Linkery. He thinks tipping is absolutely ridiculous. If tipping had never been invented and you were starting a restaurant, would you use tipping as the way to compensate your best employees, your most important employees, all your employees? Would that be the system that you would pick in a vacuum to compensate your team? And I think the answer is clearly no because it's a stupid system. So why not do it the right way even if it's a little scary? Now, if you live or travel outside the United States, this entire discussion on leaving a tip in a restaurant might seem ridiculous. Much of the world operates on the simple premise of a service charge or a fixed price, no tip expected.

The U.S. is empirically tip crazy. In the U.S., we have 31 different service professions being tipped. That's Magnus Torfessin. In Canada, we have 26 or 27, which is the same as in India. In the Netherlands, we have 15. Then we have in Norway, Sweden, and Denmark, we have between 5 and 10. Torfessin teaches entrepreneurship at the Harvard Business School. In Japan, we have 4.

And in Iceland, we have zero. Guess where Torfson is from? Yes, Iceland. So that's on the exact opposite end of the spectrum from the U.S., which is the country where tipping is most prevalent. Now, why was he comparing tipping in countries around the world? What does his research show? Well, if you're looking for

yet another reason to hate tipping, listen to this. The more tipping you see in a given country, the more corruption you generally see in that country as well. Here's how we came to that conclusion. So we started by collecting information about tipping in some 33 different countries and in 33 different service professions. These are waiters, hairdressers, taxi drivers, and so on. And we also looked at the levels of corruption in these countries, looking at how they scored on the Corruption Perception Index, which is publicized by Transparency International. Running a simple correlation, we found that there is a positive relationship between those two, which could have been for many different reasons. But we then controlled for a number of other factors such as GDP, the culture in a country in general, homicide rates and other measures of legal enforcement. And this relationship stayed significant. In other words, we found that even after controlling for these other things,

we still find this positive relationship between tipping and corruption. Why in the world would this be? Was Torfessin surprised? Well, so I was not as surprised as many others. I started this research because I had an inkling that there was this dark side of tipping. In the US, we have a strong norm for tipping. And so if you're an upstanding and law-abiding citizen, you're very likely to be also a good tipper because that's what the norms tell you. And you're also likely to avoid corruption. But across countries, we see a different pattern where these norms that encourage tipping, which is a form of informal payment for services, may be leaking over into other forms of exchange which are not as positive and not as socially beneficial as tipping.

So in the end, Steve Levitt is right to dislike tipping, isn't he? Even if he's not right for all the right reasons. I don't like to tip. I think tipping's unpleasant. As I said earlier, it's not that Levitt is ungenerous. It's just that tipping is too woolly, too random, too confusing. Well, I tip caddies. So when I play golf, I'm extremely generous with caddies.

See, I think my tipping is rubbed off on you, frankly. Because when we met, you didn't tip anybody. You would barely tip in a restaurant. Well, I didn't like to talk to people. So I just let you do the tipping because that was easier. But you have a different strategy than me. Every time you get into a car that takes you from some place to another, as we often do when we're on the road, you tip the guy, which I think is a terrible equilibrium. So I am in a different equilibrium where for the entire year, I do not tip anyone ever.

No mention of it. And then what I've taken to doing now is there's a car service I use a lot to get to the airport. And so what I did is instead of ever tipping, I just sent a bunch of cash to this car service. And I said, well, you just give it to the drivers according to what you think would be fair. I'm sure that was distributed equally, right? I don't know what equally, but I will say the reaction of the driver. Let me rephrase. I'm sure that was distributed at all. An envelope of cash comes to like the guy, one person at a car company gets, that's how you tip. It is funny. So I called up the,

I called up the car company and said, I would like to give this money. And the woman said, definitely send it right to me. And I thought it would never be distributed. But what I will say is that the reaction I've gotten from the drivers has been really, really positive. And I thought it would never be distributed. But what I will say is that the reaction I've gotten from the drivers has been really, really positive. And I sometimes won't see these drivers for months and months, and they will say how thankful and grateful they were that I made this generous gift. I think it really works so much better because the hard part about tipping is what if you don't have the right change? And then you've got to say, oh, hey, I'm really sorry. Can I tell you something, though? I really think it's the duty of an adult in a tipping society to like pre-think that.

It's like when I go to a – like if I go away with the family, if we're going on vacation somewhere and we're going to be staying in a hotel, I like load up on the right denomination bill. Because I feel like – here's what I feel like. I want to reward the people who are working hard whether or not they really deserve it because they're already working hard. And I figure that probably most of those people that I come into contact with in that situation, hotel, car, whatever, are being underpaid for what they're working. That's my view. Maybe I'm wrong. Maybe I'm naive. Maybe I'm a bleeding heart.

But that's the way I feel. I think that's nice that you work that hard. But I don't work that hard on other people. Well, let me just say this. I was in Chicago a few weeks ago. I flew out to work with Levitt. I got picked up at the airport by a car, same car service that Levitt uses, it turns out.

And my phone rang, and it was Levitt. So I said, hey, Levitt. And the driver says, that's Levitt? That's my boy, Steve Levitt. So I said, hey, Levitt. And the driver says, that's Levitt? That's my boy, Steve Levitt. So apparently, Levitt's strategy works just great. Hey, podcast listeners, next week on Freakonomics Radio, we all know that our families make us who we are. And it can be great to have strong family ties.

But it seems there's a downside to strong family ties. People who rely on the family tend to trust mostly the family and less the outside world. Therefore, they tend to be more inward looking and they develop a lower level of social capital or political participation. Yet another reason to blame your family for everything that makes you unhappy. That's next time on Freakonomics Radio is produced by WNYC, APM, American Public Media, and Dubner Productions. This episode was produced by Susie Lechtenberg with help from Beret Lamb. Our staff includes Catherine Wells, David Herman, and Chris Bannon.

Colin Campbell is our executive producer. If you want more Freakonomics Radio, you can subscribe to our podcast on iTunes or go to Freakonomics.com, Thank you.