Disentangling Customer and Employer Discrimination Using State Variation in the Tipped Minimum Wage

Employees who receive part of their compensation as tips may be subject to a type of discrimination that is not regulated or prohibited. This discrimination affects not only earnings, but employment. In many US states, employers are able to pay a reduced minimum wage to employees who receive regular tips, as long as the tips are sufficient to bring earnings to the standard minimum wage. Employers therefore have a financial incentive to hire and retain only those workers who are expected to receive adequate tips. Although case study surveys of customers and tipped employees suggest that discrimination in tipping exists and may lead to discrimination in hiring, no large-scale empirical analysis has been undertaken on this topic. In this paper, we identify patterns of gender and racial employment across US states that are linked to the gap between the standard minimum wage and the sub-minimum wage. Importantly, our analysis suggests that white women benefit from consumer discrimination in tipping. In contrast, there is evidence of employer discrimination against minority men and women, most robustly for Black men and women, with regional variation for other groups.