Written by Peter Adrian   

I originally posted this on my academic blog, but I'd like it to find a wider audience because I think there's an important message here.

Waiting: An Economic Parable

Ever since the midterm elections, one part of my brain has been quietly fuming about tax rates. The dominant narrative that emerged and still holds sway in public discourse is that lower tax rates are better, especially for businesses and wealthy individuals. The main theory held to account for this idea is that higher tax rates will stifle economic growth by reducing the incentive to work and be productive. Looking at this idea through the lens of my work experience, however, brings me to an opposite conclusion. It occurs to me that a higher tax rate would serve as an incentive to work harder and earn more to make up for the lost income.

For over twenty years, I have worked as a waiter and bartender. While restaurant servers are paid a nominal hourly wage that ranges anywhere from "a joke" to "chicken feed," the bulk of our income comes from tips that our guests leave us when they pay their bill. Now I realize that the whole notion of tipping is somewhat controversial, but I beg the reader to let it go for now; perhaps it is better to think of us as commissioned sales reps with a nominal base. Let us focus on the numbers.

Suppose I work at an upscale restaurant where, on a typical night, I can ring up around $1000 in sales. I should average around 15 percent in tips for the night, grossing roughly $150. But I don't do all that by myself. I have a busser to help pour water, clear plates, and reset tables; people at the front desk to greet and seat guests; and a bartender pouring drinks and possibly fetching bottles of wine. As a server, then, I collect gratuities on behalf of the entire service staff and cut them a share at the end of the shift. The exact breakdown of distribution varies from restaurant to restaurant, but in The Hypothetical Bistro it goes something like this:

2% of sales to the busser, or $20
1% of sales to the front desk, or $10
1% of sales to the bar, or $10...total tip-out is $40; net tips are $110.
Cooks don't get tipped out. They eat steak for dinner. We move on.

What if the rate goes up? Suppose the support staff go to the manager and say that they're getting too low a percentage for the work they do, and they need a bigger cut from the servers. Suppose that the manager agrees, and decides to raise the tip-out to 6 percent, split the same way. What will we servers do?

Obviously, we have options. If one assumes perfect fluidity in a marketplace, then we will simply move on to another restaurant where we will make the same money as we did before. Such fluidity is more the province of economics textbooks than real-world situations, though. In the real world, people face constraints on the choices they can make. There may not be other restaurants in town that are as good, or that are hiring; a server may not want to give up the advantages of seniority for uncertainty of a move; he or she may have limited availability, and this is the most accommodating place; and so on. My experience has shown me that, up to a certain high point, most people will take the hit and keep moving, finding ways to make the new situation work. It generally takes a lot to make someone change jobs, unless they're already unhappy and looking for that last straw.

So, if I want to stay where I am and keep bringing that $110 home, I will need to raise my game. I must either raise my tip percentage, hard to do since folks are so fickle; or, more feasibly, increase my sales numbers. And so it begins: a better bottle of wine here, a single-malt Scotch there, desserts and cappucinos all around. Maybe I start my shift a little early to pick up an extra table, or stay late to do the same. I'm more focused and efficient; my tables turn a little more quickly, and people are a bit more appreciative. Over the next few weeks, through working both harder and smarter, I gradually build my sales volume up to around $1200 per night, netting me that magical $110 again. Other servers have done the same; the support staff is happier than ever, the customers are being treated like royalty, and the restaurant's sales increase as well.

Have I made the analogy clear enough? The restaurant stands here for the national economy; the manager is Congress; the server represents the "movers and shakers" of the economy, businesses, corporations and entrepreneurs; the customers are still customers; last but not least, the support staff is the public sector-roads and bridges, ports and highways, social services, education, the social safety net, and so on-which provide so much of the capital people use to make a living. Fortunes are not created "ex nihilo" in a vacuum but at the end of a chain of materials, people, and events. As with Carl Sagan's apple pie, if you want to make one from scratch, you must first invent the universe-or at least a functioning society.