The Least Effective Minimum-Wage Hike

But new research shows that raising the minimum wage for tipped employees does little to help poor or low-income families. The federal minimum wage for tipped workers isn’t really $2.13. It’s the same $7.25 as for other workers, but it’s paid by tipping customers as well as employers. Under federal law, employers must pay a cash wage of at least $2.13 and top it up to the regular $7.25 minimum wage if tips aren’t enough to make up the difference. Employers are on the hook to pay $2.13 even if tipped minimum wages earned per hour are much higher, as they often are.

Would a higher tipped minimum be beneficial? People confuse the issue of low wages versus low family incomes. We should care more about the latter, since family income determines how much rent, food and other goods a family can afford.

Many low-wage workers aren’t in low-income families, but instead are secondary workers in high-income families. Additionally, many low-income families have no workers. Thus, a higher minimum wage may deliver few if any benefits to low-income families. Moreover, job loss resulting from a higher minimum wage can lower income substantially.

Most studies of the link between general minimum wages and poverty have failed to find evidence that a higher minimum wage reduces poverty. But would raising the minimum wage employers have to pay tipped workers do more to help poor and low-income families?

In a new paper,

Maysen Yen

and I studied the direct effects of increases in tipped minimum wages in states that deviate from federal policy. Three findings all indicate that raising the minimum wage employers have to pay tipped workers is an ineffective strategy to help poor and low-income families.

First, each 10% increase in the tipped minimum wage reduces the employment of tipped restaurant workers by 0.8%. That’s not a huge effect until we consider that recent proposals would increase the tipped minimum wage dramatically. For example, raising the $2.13 tipped minimum wage to the regular minimum of $7.25 could reduce tipped restaurant employment by more than 20% within a year or two.

Second, we examined the direct effect of increases in state tipped minimum wages on the likelihood that families were poor. Consistent with findings for general minimum wages, there is no clear evidence that increases in the tipped minimum wage reduced poverty or the incidence of low income.

Third, we compared raising the tipped minimum from $2.13 to $7.25 in states where federal policy prevails and an equivalent increase in the regular minimum wage that raises the total wage bill for employers by the same amount. Neither policy does much to increase incomes for poor or low-income families. The general minimum-wage increase is better targeted at low-income families and raises earnings for more workers. The problem is that many tipped workers earn more per hour already—precisely because they receive tips.

Raising the minimum wage so that employers must pay tipped workers more—when the minimum is only $2.13—is a great sound bite. But a higher tipped minimum wage will do little to help low-income families and even less than an ineffective general minimum-wage increase.

Mr. Neumark is a distinguished professor of economics and co-director of the Center for Population, Inequality and Policy at the University of California, Irvine.