Introduction
Tipping has long fueled significant economic activity in the United States, particularly in service industries since the 1930s. Annually, the restaurant industry alone sees an estimated $40 billion in tips. In “traditional tipped industries” like nail salons, casinos, and taxis, tips often constitute more than half of a workers’ hourly minimum wage.
However, the rise of app-based services like rideshare and food delivery has introduced a less consistent tipping culture in the U.S. services industry. For instance, app-based rideshare drivers typically receive an average of only $1.00 per hour in tips, significantly lower than in traditional sectors.
Most Americans’ beliefs about tipping are largely shaped by cultural tradition and social norms rather than conscious reasoning. Tipping has become deeply ingrained in U.S. society over the years, rooted in folklore and societal expectations. While many people may not consciously understand the reasons behind tipping, they often feel obligated to tip in certain situations to avoid social stigma, embarrassment, or a perceived loss of respect.
When analyzing the practice of tipping, it appears irrational from a critical perspective. Tipping typically occurs after a service is rendered, which challenges basic economic principles of rational cost-benefit exchange. In scenarios where individuals act solely in their self-interest and are unaffected by social norms, there is little incentive to tip without perceived consequences. This phenomenon is particularly evident in the on-demand app-based service sector, where transactions often lack the interpersonal interactions that traditionally support relational commerce. Digital labor platforms prioritize efficient transactional exchanges over fostering personal connections.
The difference in tipping behavior between traditional tipped industries and the app-based services sector is frequently attributed to the incomplete transfer of historical tipping customs and etiquette into the digital realm. Many suggest that closing this gap hinges on educating consumers about the universal applicability of tipping etiquette. By reminding users that the same norms they observe in traditional settings also enhance service experiences in app-based platforms, we can effectively bridge the tipping divide between these two contexts.
In today’s U.S. service economy, gratuities for many lower-skilled, lower-wage service workers have evolved from a discretionary social gesture into a vital component of their income. Economic trends clearly show a growing population of these workers who increasingly rely on tips to achieve a living wage. It is therefore imperative to rethink the role of gratuities in today’s economy—how they are perceived, how they are distributed, and particularly how they can be innovatively integrated into the modern service sector, including app-based services. For many service workers, tipping has become essential for their financial stability, highlighting the urgent need to adapt tip transactions to align with contemporary realities.
The Expanding U.S. Service Industry
In today’s industrialized U.S. economy, the service sector has emerged as the primary driver of economic growth and prosperity. In 2018, services accounted for a significant 68% of U.S. GDP, reflecting a profound shift where service provision surpasses goods production in economic activity. Technological advancements further amplify this trend, enabling widespread access to various service industries through digital on-demand labor platforms. As these platforms facilitate near-frictionless entry for individuals, they continue to bolster the importance and expansion of the U.S. service economy.
The U.S. service sector has historically been divided between higher-skilled professions like doctors and lawyers, and lower-skilled roles such as restaurant servers and taxi drivers. Since the early 1980s, this division has become increasingly pronounced as job opportunities have expanded at the extremes: high-skilled, higher-paying occupations versus low-skilled, lower-paying jobs. Concurrently, middle-skill, middle-wage jobs have seen a decline.
This polarization in the service labor market has been further exacerbated by the rise of the contingent workforce—a group comprising freelancers, independent contractors, and app-based labor platform workers hired on demand. This trend has particularly reshaped the lower-skilled services sector, where workers often face irregular hours, low wages, and lack of traditional employment benefits. The impact of this contingent workforce on the economics of labor in the U.S. cannot be overstated, highlighting profound shifts in how services are delivered and labor is organized.
Until the turn of the 21st century, lower-skilled service jobs typically offered workers a decent base wage, often supplemented by gratuities, ensuring a viable living income. However, pivotal events around the early 2000s precipitated a decline in base wages for these workers, rendering them insufficient to sustain a living wage.
In June 2009, the U.S. embarked on its longest economic expansion in history, a period that sadly concluded in March 2020 with the onset of COVID-19. While economic expansions are generally celebrated, the latest one revealed a stark disparity in its benefits: higher-skilled service workers reaped greater rewards compared to their lower-skilled counterparts. Additionally, this expansion coincided with inflation rates that eroded the base wages of lower-skilled workers, leaving many unable to achieve a sustainable living wage.
Throughout the recent U.S. economic expansion, the federal government and many state legislatures hesitated to raise the legally mandated standard minimum wage. Since 2009, the federal minimum wage has remained stagnant at $7.25 per hour, marking the start of this prolonged period of economic growth. Currently, only 29 states have set their minimum wages higher than the federal standard, with just 14 of those states exceeding $10.50 per hour—the benchmark many wage and labor experts deem essential for achieving a living wage in the U.S.
The inadequacy of most legally mandated minimum wages becomes especially pronounced in sectors of the U.S. economy where the “tipped minimum wage” applies to service workers. This separate minimum wage, established by both federal and state governments, is lower than the standard minimum wage and is intended for workers who presumably earn a significant portion of their income from customer gratuities. The rationale behind the tipped minimum wage is that employers can pay less in base wages, provided that tips received by workers bring their total earnings up to or above the standard minimum wage threshold.
In theory, the concept of a tipped minimum wage may seem reasonable. However, in practice, it has proven disastrous for many lower-skilled service workers. Since 1991, the federal tipped minimum wage has remained stagnant at a mere $2.13 per hour. Shockingly, 17 states still adhere to this federal rate for tipped workers. Across 36 states, including the District of Columbia, the tipped minimum wage falls below $5.00 per hour, underscoring the financial challenges faced by these workers. Only nine states have set a tipped minimum wage above $8.50 per hour. Moreover, due to lax regulatory oversight and enforcement of minimum wage laws, ‘wage theft’—where tips are confiscated or employers fail to compensate when tips don’t cover minimum wage—is all too common.
The wage landscape for lower-skilled service workers in the U.S. is a pressing concern, especially given the current economic trajectory. Ideally, these workers would have clear pathways for upward mobility, reducing their proportion in the overall workforce. Unfortunately, the reality is starkly different. COVID-19 has driven U.S. unemployment rates to an estimated 15%, with projections suggesting that only 60% of those displaced will regain employment. Many will find themselves moving down rather than up the pay scale. Looking ahead, lower-skilled service jobs are anticipated to be among the fastest-growing occupations in the U.S. as the economy strives to recover from the pandemic’s impact.
For today’s average lower-skilled service worker, tips have evolved far beyond a social nicety—they are now essential income. In the 21st century, these gratuities have become a fundamental aspect of earning a living wage, necessitating regular and substantial contributions from customers. Pursuing tips has become a strategic business endeavor for service workers striving to make ends meet.
This shift in the role of gratuities demands a corresponding evolution in how tipping is perceived, encouraged, and facilitated within the U.S. service economy. It is imperative to reimagine and innovate the dynamics of gratuities to adequately meet the wage requirements of today’s service workers. The time has come for a transformative approach to the business of gratuities.
How Tipping Became Part of the American Economic Landscape
Tipping transcends being a mere social norm—it fuels a multi-billion-dollar market that sustains millions of American workers.
The origins of tipping are steeped in countless stories and folklore. Dating back to 17th century England, tipping emerged in taverns as a means for patrons to attract the attention of service workers. It later crossed the Atlantic to the United States in the 1850s, introduced by wealthy Americans returning from European travels. Initially seen as a display of social status, tipping was met with widespread disdain among Americans who viewed it as antithetical to American values, promoting a class hierarchy in service industries.
From the late 1800s to the early 1900s, there were concerted efforts across the United States to abolish tipping. Lobbying groups and state legislatures in states like Washington, Mississippi, Arkansas, South Carolina, and Tennessee actively pursued anti-tipping laws. However, these efforts faced a significant legal setback in 1919 when the Iowa Supreme Court, in the case of Dunahoo v. Huber, declared state anti-tipping laws unconstitutional. Since then, there have been no substantial attempts in the United States to outlaw tipping.
Why We Tip Today
The reasons behind why we tip today are surprisingly complex. Scholars who have delved into the study of tipping reveal that it’s driven by a mix of neoclassical economic factors, social norms, and psychological motivations. These diverse and sometimes unrelated factors can influence whether a customer decides to leave a tip during a service interaction. For service workers, this uncertainty means that their chances of receiving a tip often feel like a gamble, akin to spinning a roulette wheel.
The neoclassical economic rationale behind tipping revolves around customers incentivizing service workers to provide them with a higher level of personalized service than they might receive otherwise. From this perspective, tipping is seen as a means for customers to secure a greater benefit from their interactions compared to those who do not tip.
Take, for example, the app-based services industry: every rideshare customer expects transportation, grocery delivery customers anticipate their groceries promptly delivered, and food delivery customers await their meals from a chosen restaurant. The service provided, however, varies based on individual preferences. Through tipping, customers effectively set the price they are willing to pay for the level of service they desire. Some may prioritize immediate grocery delivery, while others might be content with next-day service.
When the dynamics between a service worker and customer allow clear communication upfront about desired special services, and the customer shows willingness to compensate through a tip, it creates a win-win scenario from a neoclassical economic standpoint. The service worker can prioritize their time for maximum compensation, while the customer gets tailored service at an agreed-upon price.
However, when these conditions are flawed, the neoclassical rationale behind tipping can lead to issues. Some customers may exploit the situation to maximize their gain without rewarding the service worker, as seen in app-based platforms where ‘tip-baiting’ occurs—where customers promise a substantial tip to secure better service but fail to follow through after the service is provided.
The neoclassical economic view of tipping suggests it’s driven by personal gain within the service interaction. However, tipping is also influenced by non-economic factors such as social and psychological motivations.
Many individuals tip because they genuinely want to support service workers. Anecdotal evidence, particularly from the app-based labor sector, highlights this altruistic motivation. In February 2019, DoorDash customers raised concerns that their in-app tips were not reaching the service workers as intended. This outcry prompted DoorDash to revise its tipping protocols, reflecting customers’ desire to ensure their tips directly benefited those providing their services.
Beyond economic factors, U.S. consumers often cite a desire to reward good service as a primary driver of their tipping habits. This motivation aligns with theories from economists, psychologists, and sociologists alike, such as reciprocity and equity theory. These theories suggest that people feel a natural inclination to reciprocate favors and maintain fairness in their relationships. In the context of service worker-customer interactions, tipping serves as a means to uphold equitable relationships by compensating for services rendered with monetary appreciation.
Some individuals tip to bolster their own self-esteem. Scholars argue that tipping can be driven by consumers’ desires for social approval, status, and positive regard. This motivation aligns with research on the human need to belong, manage impressions, and seek status. People often value the opinions of others due to the tangible benefits they bring, as well as the intangible rewards of feeling admired, respected, and trusted.
While the social, psychological, and cultural motivations for tipping are fascinating social conventions, they are ephemeral and do not provide a concrete foundation for service workers to systematically enhance tipping transactions with customers.
What Innovating the Practice of Tipping Involves
With the U.S. service sector expanding, especially through app-based gig platforms, an increasing number of workers rely heavily on tips as a significant part of their income. This shift has transformed the pursuit of customer gratuities into a crucial occupation for many service workers. No longer can they rely on the unpredictable whims of social or psychological motivations from customers. The practice of tipping must evolve to align with the demands of today’s U.S. economy.
Amid this evolving landscape, a crucial question arises: what does the future of gratuities look like? We propose it involves the integration of technology into the service worker-customer relationship. This means bundling existing digital tools to create platforms that not only facilitate tipping driven by social and psychological cues but also harness economic incentives to empower service workers and customers in their interactions.
Innovating tipping requires developing digital platforms and communities where service industry workers can anticipate individual customer needs before service provision, ensuring customers are incentivized to share their gains through gratuities. This innovation empowers service workers with digital and mobile tools to actively influence the frequency and amount of gratuities they receive, marking a crucial advancement in their work-related technology.
Ultimately, the innovation of gratuities aims to establish digital platforms that reinforce a mutually beneficial commercial relationship between service workers and customers, where gratuities are seen as integral to fostering win-win interactions.