The city of Seattle recently jacked up its minimum wage to $11/hr, with scheduled future increases up to $15/hr. In response, one of the city’s landmark restaurants, Ivar’s Salmon House, took the unusual step of paying workers $15 two years ahead of schedule, and instructed customers that they no longer need to leave tips. Ivar’s increased its menu prices by 21 percent.
The Associated Press wrote a glowing report about Ivar’s new policy. The report, which was picked up by dozens of newspapers around the country, including the Dayton Daily News, made Ivar’s policy sound like it created only winners, no losers.
It is staff, not diners, who feel the real difference, with wages as much as 60 percent higher than before. One waitress is saving for accounting classes and finding it easier to take weekend vacations, while another server is using the added pay to cover increased rent.
The AP article strongly suggests that everyone at Ivar’s—management, staff, and servers—is doing at least as well as before, with many doing better. But that is possible only if Ivar’s is taking in more money overall from diners. The article suggests that is, in fact, the case: “The restaurant’s revenue is up 20 percent.”
Where does this extra revenue come from? Sure, prices are higher, but remember that diners no longer need to tip. Doesn’t the lack of tips offset the effect of the higher prices? Yet, Freedom!’s on-the-scene reporter, Ron Browning, went to Seattle to find out. According to Ron’s exclusive report from Ivar’s, social conditioning makes it hard not to leave a tip.
Though the menu has a slight disclaimer about the minimum wage hike and that tipping is no longer necessary, it is difficult to just walk away without leaving a tip. It might be possible in a very impersonal setting, but with tipping so ingrained in the system, it is hard not to feel like a heel, to just walk away without leaving a tip.
So no doubt a lot of customers are still leaving tips, and assuming that business does not fall off, that would explain why there’s more money to go around for everyone at Ivar’s. But that would also suggest that the no-tip disclaimer is irrelevant. It would also suggest, implausibly, that Ivar’s previous prices were too low; to increase revenue, all they had to do was to increase prices by 21 percent across-the-board. Why wouldn’t they just increase prices sooner, without waiting for the excuse of higher wages?
A more plausible interpretation is that some diners are tipping as usual but others are now tipping much less, if at all. That suggests that Ivar’s policy is effectively a form of price discrimination; some customers pay more (including tips) than others for the same good.
Price discrimination can increase revenue if Ivar’s has essentially two types of diners; those that are very loyal to Ivar’s and don’t care too much what they pay, and those that are more cost-conscious and willing to dine somewhere else. The policy cleverly allows Ivar’s to extract more revenue out of the devoted customers, while the no-tip option allows them to retain their more cost-conscious customers.
Price discrimination, however, only works in certain circumstances. In particular, the firm needs to have some degree of monopoly power, which means the firm can’t have a lot of competitors selling almost exactly the same product. Ivar’s does plausibly have some monopoly power, since the restaurant is a longstanding fixture in Seattle, and offers a unique dining experience with the water nearby outside, and the interior decorated with antique and native art. In contrast, a conventional pizza-and-subs joint generally faces too much direct competition to successfully practice price discrimination.
In any event, the AP article depicted the new policy as a terrific boon to the restaurant’s servers.
Rochelle Hann, 25, is a second-generation worker at Ivar’s. Like her mom, she has performed a variety of roles, including serving, bookkeeping and even dressing up as a giant clam. If she keeps working 30 hours a week, her annual pay will jump about $12,000 — money she’s socking away for accounting classes at a community college.
“Before, I felt like it was maybe not quite paycheck-to-paycheck, but now I don’t even have to worry about it,” she said. “I just went away for the weekend, and it was an easy expense.”
Brett Richards, a 50-year-old singer and guitarist, has worked 25 years in food service, including the past eight at Ivar’s. Before, he made minimum wage, plus tips. Now, he gets $15 an hour, including a share of the 21 percent menu price increase, plus any additional tips customers leave. He expects to make almost $7,000 more this year, money that’s helping him with his increased rent and with taking his kids out to eat a little more often.
Our reporter, however, got a rather different reaction from his own server.
She has worked at Ivars for a year and half, as she studies at the University of Washington. Last summer she was earning enough to be paying down on her student loans, this summer has been a bit more lean. “To be honest”, she said, “I really do not like the change.”
As usual, media reports need to be taken with a very large grain of salt.