In the eleventh hour, Massachusetts lawmakers are considering bills to eliminate the state’s tip credit and add on a minimum wage increase up to $20 per hour. Such an unprecedented move will worsen economic hurdles facing restaurants and threaten the livelihoods of thousands of employees.
As part of a so-called “grand bargain” signed by Governor Charlie Baker in 2018, Massachusetts has already seen a hike in the regular and tipped minimum wages each year.
Restaurants, which employ the majority of minimum wage earners, are struggling to keep up. Employment growth in the state’s restaurant industry has completely stagnated. Even before the pandemic, Bureau of Labor Statistics data shows Massachusetts’ full-service restaurant industry experienced net job losses.
Massachusetts has seen waves of restaurants close in recent years, citing ongoing pandemic struggles and restrictive government mandates. Owners of the recently-closed award-winning vegan restaurant True Bistro have said the rising costs of operating in the state gave them “no way forward.”
The latest proposals from state legislators would only serve to make an already dire situation worse.
In the best of times, even high-end restaurants operate on very slim profit margins. By allowing employees to benefit from lucrative tipped positions, these restaurants can offset high labor costs and up their chances of staying in business. A robust tip credit doesn’t mean these employees aren’t making the minimum wage.
Under Massachusetts state law, restaurant employers may pay the base hourly rate of $6.75 per hour, and are legally required to ensure tipped employees earn at least the regular $15 minimum hourly rate when tips are factored in. However, these servers and bartenders typically earn several times more than the full minimum wage rate – as high as $50 an hour – through their tips.
When tip credits are eliminated, economists find tips are negatively impacted. Research from Cornell University finds as tipped minimum wages increase, the percentage left as tips for servers in full-service restaurants decreases. This isn’t just theoretical; data from Toast credit card transactions reveals that states like California with no tip credit have the nation’s lowest tipping percentages.
Without a tip credit, Miami and Trinity University economists estimate that Massachusetts employees could lose up to $29 million in earnings statewide.
This loss is a direct result of tip credit elimination, as restaurants are forced to make tough decisions to keep customers in the door while also battling rising labor costs. Boston-area restaurants have already started experimenting with service charges to offset incessant wage mandates. These charges are not legally the same as tips, but may be accompanied by policies deeming tipping “appreciated but not necessary” to limit customers’ sticker shock at the new costs of dining out.
This phenomenon is playing out elsewhere in the country where tip credits have already been eliminated, including Washington, D.C., where servers are already reporting reduced tips.
It’s no wonder every single one of Massachusetts’ New England neighbors has maintained the tip credit. They’ve done so through a movement led by tipped employees who say they aren’t asking for this system to change.
Now, add in a $20 minimum wage without a tip credit, and the hit to restaurants – and their employees – only worsens. Roughly 80% of economic studies over the last three decades find steep minimum wage hikes lead to job losses. For Massachusetts, that could mean killing roughly 10,000 Bay State jobs. Restaurants might entirely shut down: A Harvard Business School study estimates each $1 increase in the minimum wage for restaurants increases their likelihood of closure by 14%.
Evidence shows that proposals to end the tip credit and drive up the minimum wage have a negative impact on jobs and earnings statewide. Massachusetts lawmakers should be wary of any arguments that ignore these economic realities.
Rebekah Paxton is a former Groton resident and serves as Director of Research at the Employment Policies Institute in Arlington, Va.