Question

In restaurants, it is common for waiters and waitresses to receive a substantial amount of their earnings in tips (with low base wages). But other workers (such as cooks, and those who clear and clean the tables) are paid hourly wages. From the point of view of creating the right incentives for workers, try to explain/answer the following:

Waiters and waitresses get a large share of their pay in the form of incentives (from tips), but other restaurant workers do not. Why?

In contrast to other incentive schemes in whichemployers pay for certain types of behavior, restaurant owners let customers decide how much to pay. Why?

Minimum wage laws in some states allow a tip credit. For example, if the minimum wage is $10, and there is a 50% tip credit, then the employer only has to pay the worker a base wage of $5/hour, as long as tips provide at least another $5/hour (and hence the wage is at least $10). Other states do not allow a tip credit, in which case employers have to pay a base wage at least equal to the minimum wage. In light of your answers to the questions above, in which states is it likely that waiters and waitresses provide better service? Why?

Answer 1

Waiter/Waitress are front end customer facing employee and they are the one whose performance can only be judged by the consumer. Waiter faces the wrath for bad food as well as responsible for service. This incentivises the waiter to service cusy to best of their abilities. Also from economics stand point other workers are paid over the minimum wage and Equilibrium market will have those salaries competitive to other restaurants and they can leave and rejoin another.

Customer gets to decide since the performance of waiter can only be evaluated by the client they are serving and this is over and above the expected revenue for employer and hence does not affect restaurant financially

Waiter and waitress are likely to provide better services where there is no tip credit since the service quality is incentivize through tip payment whereas in other case it gets deducted in for of tip credit from minimy wage hence not completely incentivises.