By Emma Garrison
Context and Background
Debates around poverty have long dominated public policy debates; in his seminal piece “The New American Poverty,” Harrington (1985) addressed the rising threat of poverty among working-class Americans and argued that the United States still faced the same fundamental economic issues that plagued the early 1980s. Notably, he discussed the “feminization of poverty,” as negative stereotypes around women’s supposed reliance on welfare arose in connection with welfare programs like Aid for Families with Dependent Children (AFDC) (Harrington 1985).
The political discourse around poverty has frequently included debates about the economic impact of the minimum wage, with conservatives decrying its impact on growth and liberals touting its benefits for individuals’ quality of life. The United States has added to this complexity with its two-tiered wage system, which authorizes employers to provide wages below the statutory minimum to workers who receive tips. Under United States law, employees who receive more than $30 per month in tips are exempt from federal minimum wage laws. Their employers can instead pay them a “subminimum wage,” currently set at $2.13 an hour at the federal level, which can be increased by state legislatures (U.S. Department of Labor 2021).
Theoretically, the combination of the subminimum wage and tips should always provide employees a salary at or above the minimum wage. However, the reality is dramatically different: in 2014, the median tipped worker took home $10.22 an hour, compared to a median of $16.48 for all workers. This disparity results in slower growth in the tipped sector, higher poverty rates within the tipped labor force, and reduced consumption opportunities and additional strain on government-provided social services that impact the economy as a whole (Allegretto and Cooper 2011). Furthermore, the two-tiered wage system has significant implications for inequality, as the tipped workforce is disproportionately female; these women, especially those in the restaurant industry, are often forced to tolerate harassment in order to earn the tips that represent their primary source of income (ROC United 2012). These women also face disproportionate rates of poverty, corroborating the link Harrington drew between femininity and poverty over thirty years ago. Tipped work industries are also plagued with racial discrimination, as workers of color consistently receive lower tips for comparable work performance and experience widespread occupational segregation (Reyes et al 2019).
Subminimum wage policies have a disparate impact. At 70% nationwide, women comprise the vast majority of the tipped workforce. The nature of the two-tiered wage system means that these women must rely on their customers’ tipping behavior in order to take home more than a few dollars an hour. While national law requires employers to ensure their workers earn at least the minimum wage, compliance is low (Allegretto and Cooper 2014). As a result, women, especially those in the restaurant industry, often must withstand sexual harassment just to earn a living wage. Additionally, workers of color are often systematically regulated to lower-paying positions; as such, the two-tiered wage system perpetuates inequality across multiple dimensions (ROC United 2012).
Subminimum wage policies do not operate as intended. As stated above, employers are legally required to make up any difference between tipped workers’ total take-home pay and the regular minimum wage. However, the Department of Labor found that a staggering 84% of 9000 investigated restaurants violated this requirement, resulting in lost wages of almost $5.5 million (Allegretto and Cooper 2011). These lost wages in turn hurt the economy, depriving workers of potential consumption opportunities and forcing them to rely on expensive social services at higher rates than they might otherwise (Aaronson et al 2011).
Subminimum wages are proliferating across the economy. The landscape of the modern American economy is shaped in large part by the prominence of “gig work,” which comprises non-traditional contract, part-time, and on-call forms of employment. Advocacy groups like ROC United suggest that the gig economy represents the next frontier for the subminimum wage, as key players in the tech industry including Doordash, Instacart, and Amazon have opted into the subminimum wage system. Despite this new context for the subminimum wage, its perennial problems remain the same, as early research shows that Black workers are overrepresented in the gig economy relative to the workforce as a whole (ROC United 2019). Additionally, the gig workforce represents an opportunity for companies to rewrite the rules of the traditional economy; for example, Amazon has defined its Flex workforce as independent contractors and thus exempted them from the $15 an hour minimum wage they extended to the rest of their U.S. workforce. As a result, their drivers earn only $5 to $10 an hour despite Amazon advertising the rate as $18 to $25.
Impose Stricter Enforcement Guidelines
To ensure workers are compensated more fairly without eliminating the subminimum wage system altogether, the Department of Labor could implement stricter enforcement mechanisms, such as harsher sanctions against employers who violate worker compensation requirements and/or increased government oversight. As stated above, the vast majority of employers do not compensate employees for the difference between their take-home salary and the minimum wage, despite the legal requirement that they do so. Because of this rampant non-compliance, improved enforcement mechanisms could have a dramatic impact on tipped workers’ quality of life. However, because many workers do not know their rights or hesitate to speak up for fear of repercussions, the Department of Labor cannot rely on worker complaints to identify instances of wage theft. Instead, the Department, potentially in conjunction with the Internal Revenue Service, must regularly audit businesses to identify and sanction violators. The presence of regular audits will both allow the government to identify legal violations and provide businesses who know they will be scrutinized with additional incentives to comply.
Additionally, the Department of Labor currently maintains a database of workers who are owed back pay. Instead of providing a database that requires workers to proactively search for their owed wages, the Department should contact workers in order to provide them refunds. Employees should not have to bear the burden of chasing down the wages they are legally owed.
Protect Subminimum Wage Earners from Poverty
Incorporating periodic subminimum wage hikes in line with the rate of inflation could improve worker compensation while maintaining the subminimum wage system. The current federal subminimum wage of $2.13 has not increased for 30 years, although the cost of living has increased by an average of 2.26% per year in the same time period (Allegretto and Cooper 2011). Passing legislation that requires the subminimum wage to increase in accordance with the increase in cost of living would provide workers more purchasing power without fundamentally changing the system. Similarly, indexing the subminimum wage to the Supplemental Poverty Measure would establish a bulwark against poverty, ensuring that modern wages reflect the cost of living in the modern world.
Research indicates that the benefits of such an increase could extend beyond tipped workers to the economy as a whole (Aaronson et al 2011). A 2011 paper from the Federal Reserve Bank of Chicago found that a $1 minimum wage increase prompted a corresponding $250 increase in household income and a $700 increase in spending per quarter for households with minimum wage workers. Although this paper investigated changes in minimum, not subminimum, wages, the underlying principles hold in both cases. The increase in spending observed subsequent to a minimum wage hike resulted directly from an increase in the households’ disposable income, which would also occur in the case of a subminimum wage increase. Notably, the authors found that “employment and hours do not fall after a minimum wage increase” among their sample population. This finding has been corroborated by work focused specifically on the subminimum wage, which indicated that the employment effects of an increase are “small and not distinguishable from zero” (Allegretto 2013).
Improve Protections for Workers
The negative implications of the current subminimum wage system extend far beyond the amount that tipped workers pocket at the end of the day. The Restaurant Opportunities Centers asked more than 4300 restaurant workers whether they received health insurance through their employer or paid sick days; in each category, 90% of workers reported they did not (ROC United 2012). COVID-19 has revealed the financial and public safety importance of such protections, as workers are continually forced to choose between sacrificing a valuable shift and potentially exposing their colleagues and customers to illness. Congress should pass legislation requiring employers to provide tipped workers both paid sick leave and insurance coverage, both for the workers’ benefit and to protect public health more broadly.
Additionally, remedying the inequities of the current subminimum wage system will require addressing the rampant sexual harassment that tipped workers confront. To overcome workplace harassment, ROC United suggests that companies establish and clearly disseminate anti-discrimination and harassment policies to ensure that workers know their rights and possess the necessary tools to report any harassment they experience (ROC United 2012).
Eliminate the Subminimum Wage
Finally, eliminating the subminimum wage and transitioning tipped workers’ salaries to meet the federal minimum wage requirements represents the clearest way to eliminate the issues associated with the two-tiered wage system. As a report from the Economic Policy Institute argues, “given all the problems that the current two-tiered minimum wage system creates, it appears prudent to simply do away with the tipped minimum wage and have tipped workers nationwide be paid the regular minimum wage” (Allegretto and Cooper 2011). Additionally, results from early adopters indicate that eliminating the minimum wage will not simply replace one set of problems with another. So-called “equal treatment” states – those that have adopted the regular minimum wage for tipped workers – have been rewarded with thriving restaurant industries. Equal treatment states have seen faster growth, both in the number of restaurants and the number of jobs in the restaurant industry, than have their counterparts in subminimum wage states.
The “Raise the Wage Act” currently before Congress proposes implementing a transition over four years, which may make the proposal more politically feasible and give impacted businesses time to adjust (Morath 2021). However, business owners may still be understandably hesitant about a mandatory transition to the full minimum wage. A prospective cost-benefit analysis of New York’s transition found that the shift would translate to a 7.1% increase in operating costs (Allegretto 2018). To ease the burden of this transition, state and federal governments could provide a subsidy to offset the cost increase. This subsidy would admittedly impose an additional cost in the short-term; however, the government could recoup its investment through increased productivity in tipped industries and decreased reliance on public assistance within the tipped workforce.
Across both economic and social dimensions, the subminimum wage for tipped workers is responsible for more harm than good. The two-tiered wage system disrupts the economy by contributing to higher poverty rates, stifling growth, and increasing strain on social services. Additionally, workers of color, female workers, and those with intersectional identities are overrepresented in the tipped workforce; as such, the aforementioned negative implications disproportionately impact already-marginalized groups, thus perpetuating systems of inequality. Policymakers can and should consider a number of potential reforms to the subminimum wage system, ranging from increased oversight to total abolition. The wealthiest country in the world can no longer deny so many of its citizens a living wage: the subminimum wage must go.
Aaronson, Daniel, Sumit Agarwal, and Eric French. The Spending and Debt Response to Minimum Wage Hikes. Federal Reserve Bank of Chicago, February 12, 2011. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1144222.
Allegretto, Sylvia. Should New York State Eliminate Its Subminimum Wage? Institute for Research on Labor and Employment, University of California, Berkeley. April 20, 2018. https://irle.berkeley.edu/files/2018/04/Should-New-York-State-Eliminate-its-Subminimum-Wage.pdf.
Allegretto, Sylvia. Waiting for Change: Is it Time to Increase the $2.13 Subminimum Wage?
Institute for Research on Labor and Employment, December 1, 2013. https://irle.berkeley.edu/waiting-for-change-is-it-time-to-increase-the-2-13-subminimum-wage/.
Allegretto, Sylvia and David Cooper. Twenty-Three Years and Still Waiting for Change: Why It’s Time to Give Tipped Workers the Regular Minimum Wage. Economic Policy Institute, July 10, 2014. https://www.epi.org/publication/waiting-for-change-tipped-minimum-wage/.
Gould, Elise and David Cooper. Seven facts about tipped workers and the tipped minimum wage. Economic Policy Institute: Working Economics Blog, May 31, 2018. https://www.epi.org/blog/seven-facts-about-tipped-workers-and-the-tipped-minimum-wage/.
Harrington, Michael. The New American Poverty. National Black Law Journal, 9(2):1985. https://escholarship.org/content/qt19p7d2vf/qt19p7d2vf.pdf.
Morath, Eric. What to Know About President Biden’s $15-an-Hour Minimum-Wage Plan. Wall Street Journal, January 26, 2021. https://www.wsj.com/articles/what-to-know-about-president-bidens-15-an-hour-minimum-wage-plan-11611690956.
Restaurant Opportunities Center United. The Gig is Up: The new gig economy and the threat of subminimum wages. March 2019. Research support from the Food Labor Research Center. https://rocunited.org/wp-content/uploads/sites/7/2020/02/TheGigIsUp.pdf.
Restaurant Opportunities Center United. Tipped Over the Edge: Gender Inequality in the Restaurant Industry. February 13, 2012. https://chapters.rocunited.org/wp-content/uploads/2012/02/ROC_GenderInequity_F1-1.pdf.
Reyes, Teofilo, Julia Sebastian, and Meredith Reitman. Building the High Road to Racial Equity: Addressing Implicit Bias in the San Francisco Bay Area Restaurant Industry. ROC United, May 2019. Additional Support from James Cox, Maria Moreno, and Esperanza Fonseca. https://chapters.rocunited.org/wp-content/uploads/2019/06/TheHighRoad_RacialEquity_Report.pdf.
U.S. Department of Labor. Minimum Wages for Tipped Employees. January 1, 2021. https://www.dol.gov/agencies/whd/state/minimum-wage/tipped.