The minimum wage has been one of the most investigated and debated labor market topics among economists, politicians, business entities, and the public. Much less attention has been paid to the subminimum wage received by tipped workers (referred to as the “tipped minimum wage”). The two-tiered minimum wage system is unknown to many and the existence of the subminimum wage is often a surprise. Did you know that a waiter at a restaurant in Indiana probably earns a base wage of $2.13 per hour; $4.34 for a server in the Colorado Rockies; and $8.67 for wait staff near Olympia National Park in the state of Washington? These pay disparities are created by an obscure and often misunderstood federal provision called a ‘tip credit,’ which allows employers to pay tipped workers below the binding federal or state minimum wage.
This brief seeks to shed light on the subminimum wage, its wide differences from state to state, and its impact on workers and labor markets. First, we present the history and mechanics of the subminimum wage and the tip credit provision along with state-level variations. Second, we provide a demographic portrait of waiters and other workers in tipped occupations, who are subjected to the subminimum wage floor. Finally, we analyze labor market outcomes, such as wages and poverty rates, for the country overall and by state; in the latter case focusing on policy differences regarding each state’s allowable tip credit.