CeDEx workshop - Kelly Schmidtke (CeDEx)

Tipping, a Magnitude Effect and Fair-Wage

The magnitude effect describes the tendency for US restaurant customers’ percentage tips to decrease as their bill sizes increase. An appealing explanation for this effect is the fair-wage theory, which states that US tips depend not only on a bill size but also on what servers should earn.

The fair-wage theory sets up an interesting comparison between tipping in the US and the UK. In the US, servers are paid less than the federal minimum wage, because customers’ tips compensate for their legal loss. In contrast, in the UK servers are legally required to receive minimum wage. If the fair-wage theory accounts for the magnitude effect found in the US, then the magnitude effect should not occur in the UK.