Tipped Over the Edge

New York is the self-proclaimed 'capital of the world' though London is doing its best to capture that title. New York is also for reasons I've never fully understood seemingly the capital for businessmen-whose-trousers-are-too-short (why is that?), but this is not (yet) engrained in popular culture. However if these two titles are either undeserved or unknown, it is surely the unchallenged 'tipping capital of the world.'

The weather today had a 'real feel' temperature of 110 degrees which left me feeling sorry for poor Chicago Addick who has followed the heatwave east to the Big Apple. Hence it was hardly the best conditions for a waitress to test my patience at a traditional diner.

Spotting my accent and assuming that I was an innocent tourist sheltering from the heat rather than a fully paid-up New York City taxpayer, the waitress brought me the bill and informed me, "...it says $12.95 but it's actually $15." Now I know that the government's inflation figures are probably understated but even in 1930s Germany, prices never rose that quickly. My natural instincts told me to leave $14 and tell her I'd have left $16 if it wasn't for her effrontery, but then I realised she was really rather attractive and thus some other natural instincts left her the $15 she so dearly craved.

Apparently us Brits are notoriously poor tippers, hence her concern. When friends visit the city for the first time from Blighty I often cringe at the thought of them taking a $45 cab (plus $4 toll) from JFK, and sitting in an hour and a half's traffic, before offering a $50 note with a smile, and receiving a 'welcome to New York' tirade, probably in Gujarati.

Tipping is a peculiar microeconomic concept which is not easily explained nor rationalised given its lack of an identifiable trend both within and across different cultures. Theories on tipping usually focus upon its role as a reward for good service, or simply in purely altruistic terms.

Although rewarding good service is a noble action, it is not easily explained unless it brings in return a degree of reciprication. Tipping the maitre d' at your favourite restaurant is less of a tip, and more of an investment for example. Leaving 15-20% however at a restaurant you will likely never revisit, particularly if it was more of a reflex action than a reward, is less easily explained particularly given it is the antithesis of how consumers usually behave.

Some of the most successful retail concepts of the last decade (Matalan, Primark, Asda etc.) have been built upon the concept of 'bargains' yet tipping sees us voluntarily paying more than we need to. Moreover, if it's a 'reward' for good service, we are exceptionally (and consistently) choosy about who we tip.....the hotel bellboy who carried my suitcases ($2)....the cheerful lady who checked me in (nil).

The alternative theory of altruism is probably more helpful. I like to view tipping in terms of a regular disbursement to people whose jobs I am grateful not to have. But even here, inconsistency renders the theory near worthless; I handsomely tip taxi drivers but would likely get short shrift if I tried to tip an air stewardess who happily plied me with booze all the way across the Atlantic (now there's a service I'd gladly reward). Meanwhile my well-tipped hairdresser back in the UK definitely drove a nicer car than me which can't be right.

There is clearly not an all-encompassing explanation for tipping. However I prefer to view the phenomenon from a different angle, an angle which is perhaps particularly relevant given that in recent years tipping has become noticeably more prevalent, not less so.

Thanks to brutal competition in so many sectors, particularly from the Asian emerging markets, the bargaining power of Western workers has diminished markedly unless they are fortunate enough to have clearly identifiable 'value-added' or to work for companies with enormous economies of scale. In the US at least, this trend can be seen clearly whether one is visiting the deprived urban badlands of Detroit, or wincing at the gravity-defying prices of property in Aspen or the Hamptons. In short, inequality is rising rapidly.

Looked at another way, if one assumes that 'markets work' to some degree, and they set wages that reflect a worker's worth (however crude this might be), then the existence of a minimum wage in both the US and UK for example, suggests that if markets were given free rein then the equilibrium wage for unskilled jobs in key global cities like New York would be way below what a reasonable person would consider a 'living wage.'

Whilst government-induced minimum wage legislation can help to a degree, many recipients of tips are illegal immigrants working under the radar screen, yet doing jobs we clearly value (otherwise there wouldn't be demand for them). Hence in my view, the willingness especially of city-dwellers to subsidise this activity reflects a combination of the two theories I initially espoused (rewards and altruism), but an additional collective acknowledgement that tipping represents a 'voluntary welfare tax'. We want someone to wash our clothes but we'd rather not ruin those clothes by tripping over our cleaner begging on the subway. An example of the rare wisdom of crowds perhaps?

Similarly entire business models would not be viable without the generous tips of its customers. I regularly walk past perennially half-empty Irish pubs in New York no doubt paying market rents, and wonder how the landlord can possibly make a living. The answer lies of course in the fact that they typically pay their jovial staff a frighteningly low $2.13 per hour because the law assumes their tips will take them above the $5.15 minimum wage. Assuming a pub is open 16 hours per day and has 8 staff members at all times, the landlord saves over $140,000 per year, or the difference between a viable business and the bailiffs at the door.

Now believe you me, when I happily leave an Irish barman a handsome tip, it's not a reward nor altruism, it's simply the fact that I need a beer and I don't intend to walk more than two blocks to get it. However more seriously I wonder if tipping will become a new stealth tax which won't be reflected in the official data, yet will act as yet another squeeze on the hapless middle classes.