University of Chicago economists Dylan Balla-Elliott and Isaac Norwich found that tip income outweighed lower base wages after U.S. firms adopted tipping, suggesting customer payments can alter pay and business incentives.
Their working paper, dated Oct. 31, examines sales and payroll records for 500,000 workers at 20,000 U.S. firms from 2022 to 2025. Over the five months after firms introduced tipping, the researchers estimated that tips rose by an average of $1.47 per hour worked while base wages fell by 48 cents.
In that comparison, the authors estimated that lower base pay offset 33 cents of each tip dollar. A separate analysis of 880 workers who remained at their firms before and after tipping began produced a 23-cent estimate. Customers’ tips went to workers in full; the offset reflects the accompanying decline in base wages.
The paper also found a close link between sales and tips within firms: a 10% rise in revenue was associated with a 9.7% increase in tips. That link gives workers a potential stake in changes in customer spending, the researchers argue.
In a separate analysis, the economists gauged demand using changes in customers’ spending at other businesses. For a one-standard-deviation demand shock, they estimated that output per hour rose 1.43 symmetric percentage points at tipping firms, compared with 0.94 points at firms without tipping. The corresponding revenue responses were 2.18 and 1.14 points. Base wages and prices did not respond to that shock.
The authors interpret the larger output response as consistent with greater worker effort, although the records do not measure effort directly. In a model built from the demand estimates, a 9.7% tip share raised the estimated value of a job to workers by about 50% and firm profit by 28%. When the model held effort fixed, those estimates fell to 2.9% and 2.1%. Using the smaller 2.66% tip share estimated for adopting firms, the modeled gains were 10.7% and 5.9%.
Most firms in the study were small businesses. Food and beverage firms accounted for 53% of the sample, and retailers made up 23%. The researchers caution against treating the sample as representative of U.S. businesses generally. They also leave open why tip shares tend to remain stable within individual firms.
