Last year marked the 75th anniversary of the Fair Labor Standards Act (FLSA), the legislation that established many of the basic labor protections workers enjoy today, such as a 40-hour workweek, overtime protection, and a national minimum wage. There have been periodic amendments to the FLSA over the years, but the 1966 amendments were especially significant. They extended protections to hotel, restaurant, and other service workers who had previously been excluded from the FLSA, but also introduced a new "subminimum wage" for workers who customarily and regularly receive tips.
Unlike temporary subminimum wages (such as those for students, youths, and workers in training), the "tip credit" provision afforded to employers uniquely established a permanent sub-wage for tipped workers, under the assumption that these workers' tips, when added to the sub-wage, would ensure that these workers' hourly earnings were at least equal to the regular minimum wage. The creation of the tip credit -- the difference, paid for by customers' tips, between the regular minimum wage and the sub-wage for tipped workers -- fundamentally changed the practice of tipping. Whereas tips had once been simply a token of gratitude from the served to the server, they became, at least in part, a subsidy from consumers to the employers of tipped workers. In other words, part of the employer wage bill is now paid by customers via their tips.
Today this two-tiered wage system continues to exist, yet the subsidy to employers provided by customers in restaurants, salons, casinos, and other businesses that employ tipped workers is larger than it has ever been. At the federal level, it currently stands at $5.12 per hour, as employers are required to pay their tipped staff a "tipped minimum wage" of only $2.13 per hour, and the federal regular minimum wage is currently $7.25. Remarkably, the federal tipped minimum wage has been stuck at $2.13 since 1991 -- a 23-year stretch, over which time inflation has lowered the purchasing power of the federal tipped minimum wage to its lowest point ever.
Proposed federal minimum-wage legislation, the Fair Minimum Wage Act of 2014 -- also known as the Harkin -- Miller bill -- would not only increase the federal regular minimum wage to $10.10, but for the first time in decades would also reconnect the subminimum wage for tipped workers back to the regular minimum wage by requiring the former be equal to 70 percent of the latter. This would be a strong step in the right direction; however, we present evidence that tipped workers would be better off still if we simply eliminated the tipped minimum wage, and paid these workers the full regular minimum wage.