Raising the Tipped Minimum Wage Would Increase the Economic Security of Many Hard-Working New Jerseyans

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1 May 2014 Raising the Tipped Minimum Wage Would Increase the Economic Security of Many Hard-Working New Jerseyans By Daniel Munczek Edelman When it comes to the earnings of hard-working, low-wage New Jerseyans, there s good news and there s bad news. The good news: New Jersey voters last November increased the state minimum wage to $8.25 an hour from $7.25, and tied future increases to rising costs of living. The increase, which was overwhelmingly approved by 61 percent, is expected to benefit 429,000 of New Jersey s lowwage workers. So what s the bad news? Many New Jersey workers who live off tips continue to earn less than the minimum wage. New Jersey s minimum wage for workers who earn at least $30 in tips a month is only $2.13 an hour, the same as the paltry federal minimum. This lower wage for tipped workers is rationalized by the idea that gratuities will more than make up for the discrepancy between what an employee receives each hour and the minimum wage. And while employers are legally required to make up any difference between earned tips and the full state minimum wage, this is difficult to enforce. Workers must track their hours worked and tips received, and should they be short of the minimum hourly wage on average at the end of a workweek, the onus is on them to request additional money. Unsurprisingly, people have reported fear of reprisals for asking that their supervisors make up the gap and 1 in 10 workers in tipped occupations reports not being paid the legally required wage. 1 Increasing New Jersey s tipped minimum wage would help increase the economic security of more of New Jersey s low-wage workers, and would ensure a modest baseline of support that hard-working New Jerseyans could rely on. New Jersey Falling Behind Other States Congress created the tipped minimum wage in 1966, pegging it to 50 percent of the full federal minimum. When President Clinton passed a minimum wage increase in 1996, a Congressional compromise included in the bill removed the requirement that the tipped minimum stay locked at half the value of the standard minimum. So while the federal government last raised the national minimum wage in 2007 to $7.25, the federal tipped minimum wage was last increased in 1991.

2 Raising the Tipped Minimum Wage Nationally, its real value has fallen 40 percent since then because it has not risen with rising costs of living. This works out to $1,772 of lost income each year for full-time tipped workers in restaurants, nail salons, hotels and casinos. In New Jersey, the loss has been even more pronounced, with the tipped minimum losing nearly half of its value since 1991, equaling an annual loss of $1,994 a year. Since there s been no federal action on the tipped minimum wage for nearly a quarter of a century, most states have stepped up and increased their wage floors for tipped workers but not New Jersey. Thirty-one states and Washington, D.C., have a tipped minimum wage that is higher than the federal requirement, including West Virginia at $5.80 and Arizona at $4.90. Seven of these are equal treatment states, and mandate that the tipped minimum wage cannot be lower than the state s regular minimum wage. Eighteen other states do have the same tipped minimum wage as New Jersey, but the Garden State is the only state in the northeast that has not moved its tipped minimum above the federal floor of $2.13 an hour.2 2

3 Raising the Tipped Minimum Wage The poverty rates for tipped workers in states like New Jersey with a $2.13 minimum are about a third higher than in states where the minimum wage for tipped workers equaled the wage for all workers (14.5 percent vs percent). This disparity is even more pronounced for waiters and bartenders in $2.13 tipped minimum wage states, 18 percent of these workers live in poverty, compared to 10.2 percent in equal treatment states.3 The experience of states with higher minimum wages for tipped workers clearly demonstrates that increasing the tipped minimum wage does not lead to job losses. Many western states with higher tipped minimums have not seen employment losses, and even the lobbying arm of the restaurant industry expects that restaurant-industry job growth will exceed the national average in many states that have high minimum tipped wages, including Oregon, Nevada, California and Arizona.4 While the economic arguments that increases in the standard minimum wage reduce employment have already been shown to be spurious, there is also scant evidence that increases in restaurant wages actually result in businesses reducing their number of employees.5 3

4 Raising the Tipped Minimum Wage Living on the Tipped Minimum Wage There are 4.3 million tipped workers in the United States, and approximately 140,000 in New Jersey. Nationwide, 63 percent of employees working for the tipped minimum are 25 or older; 6 in New Jersey, the median tipped worker is 31 years old. The median hourly wage of tipped workers nationwide is $10.22, far less than the median wage of all workers ($16.48). More importantly, the median hourly wage of tipped workers is lowest in states like New Jersey that have a $2.13 tipped minimum wage. In these states, tipped workers have a median wage of $9.80 an hour, versus $11.19 an hour in equal treatment states. 7 Nearly all tipped workers lack basic workplace standards like access to health insurance and the ability to take paid days off when they are ill, and tipped workers are far more likely to live in poverty than non-tipped workers. Of 4,300 restaurant employees surveyed nationwide in 2011, 90 percent did not receive paid sick leave and 90 percent did not have employer-provided health insurance. Servers, who are almost entirely tipped workers, were nearly three times as likely to live below the poverty line and nearly twice as likely to receive Supplemental Nutrition Assistance Program benefits (SNAP formerly known as food stamps) as other workers. One in three tipped workers is a parent and one in six of those has children who are eligible for free lunch. 8 Nationally, 46 percent of tipped workers receive some form of federal assistance to make ends meet, a much higher share than non-tipped workers (36 percent). The tipped workers receiving assistance also receive, on average, far more government support than non-tipped workers on assistance ($2,588 vs. $2,114 annually). 9 In New Jersey, tipped workers are about twice as likely as non-tipped workers to live in poor households (33.9 percent versus 18.6 percent) and lack any type of health insurance (29.2 percent versus 16.3 percent). More tipped workers report receiving SNAP benefits (9.9 percent) than non-tipped workers (6.9 percent). (While we re using 200 percent of the federal poverty level to define poor household here in high-cost New Jersey, in reality it takes even more to get by. The real cost of living, based on county of residence and family composition, is almost always at least 250 percent and can be as high as nearly 400 percent of the federal measure. 10 ) On average, New Jersey s tipped workers earn less than twice that of their non-tipped counterparts (median personal income of $14,000 versus $36,400) and, as a result, are more likely to live near the poverty line: The median tipped worker lives in a household at 284 percent of the federal poverty level while the median non-tipped worker lives in a household at 455 percent. Gender Inequity While there is gender pay inequity in many industries, a disproportionate number of women work for tips in in restaurants. 11 Full-time female servers nationwide made an average of $17,000 4

5 Raising the Tipped Minimum Wage a year compared to the $25,000 of their male counterparts in In other words, women were paid 68 percent of what men made for the same job. While women make up only 48 percent of the American workforce, they are 67 percent of the workforce that relies on tips. 12 In New Jersey, 70.7 percent of tipped workers are women. Just increasing the tipped minimum to $5.08, 70 percent of the current $7.25 standard minimum, would raise the wages of over 830,000 workers nationwide, 630,000 (76 percent) of whom are women. Because of the large gender pay gap and the fact that women make up the majority of the tipped server population, an increase in the tipped minimum to just $5.08 would also reduce the gender wage gap by a fifth. 13 Put simply, lower wages for women in restaurants are a direct result of public policy. Promising Policies to Lift the Wages of Tipped Workers President Obama has expressed support for a bill introduced by Tom Harkin (D-IA) in the Senate and George Miller (D-CA) in the House of Representatives which would gradually raise the minimum wage to $10.10 and index it to inflation to ensure automatic future increases. Less advertised is the fact that the bill would increase the tipped minimum to 70 percent of the full minimum wage, effectively raising it to $7.07 an hour more than three times the current tipped minimum. While the odds of any minimum wage increase passing a divided U.S. Congress are slim, many states and localities have recently put minimum wage increases on ballots or brought them to the floors of legislatures, as New Jersey did last year. With the federal legislation unlikely to make serious headway, New Jersey policymakers need to step up to ensure greater economic security for the state s low-wage tipped workers. Ideally, the state would eliminate the state s subminimum wage and create one minimum wage for all workers, a policy embraced by seven other states. In the absence of the elimination of New Jersey s tipped minimum wage, bringing the tipped wage closer to the full minimum would be a positive step in the right direction. As such, legislation that was approved by the Assembly Labor Committee in March to increase the tipped minimum wage in New Jersey should be a high priority for lawmakers. The bill, A-857, would phase in an effective increase in the tipped minimum wage to 69 percent of the state minimum wage, which would equal $5.69 an hour if it was in effect today. (Since New Jersey s minimum wage will now change annually based on inflation, we can t say with certainty what the actual tipped minimum would be once this increase was fully phased in on January 1, 2016.) The rest of the worker s compensation would continue to be composed of tips, so long as all of that worker s earnings equaled at least the current minimum wage. This legislation would bring New Jersey more into line with the majority of American states while helping many hard-working New Jerseyans. Daniel Munczek Edelman is a Master in Public Affairs student at Princeton University s Woodrow Wilson School. He can be reached at danielme *at* princeton.edu. 5

6 Raising the Tipped Minimum Wage Appendix A: The Tipped Minimum Wage in the States 6

7 Raising the Tipped Minimum Wage Appendix B: Methodology on New Jersey Tipped Workers Data on occupation, personal and household income, age, sex, health insurance coverage, food stamp enrollment and poverty level was collected from the 3-year average of American Community Survey (ACS) data available through the Integrated Public Use Microdata Series (IPUMS). Statistics included in this report were calculated using the person-level weights provided by the ACS and based on the entire set of data collected from New Jersey. The occupations defined as tipped, with their ACS occupation codes listed in parentheses, include massage therapists (3630), bartenders (4040), waiters and waitresses (4110), gaming service workers (4400), barbers (4500), hairdressers, hairstylists, and cosmetologists (4510), and misc. personal appearance workers (4520). We chose these occupations based on previous work defining tipped workers done by the Economic Policy Institute and the White House. While non-tipped workers may also report less income to the ACS than they actually earn, tipped workers, who receive much of their earnings in cash, may be more likely to underreport their earnings. Despite this, the size of the economic differences between the two groups suggests that there is real cause for concern about the wellbeing of tipped workers. 7

8 Raising the Tipped Minimum Wage Endnotes 1 The White House, The Impact of Raising the Minimum Wage on Women and the Importance of Ensuring a Robust Tipped Minimum Wage, March 2014, 2 U.S. Department of Labor Wage and Hour Division, Minimum Wages for Tipped Employees, January 2014, 3 Economic Policy Institute and The Center on Wage and Employment Dynamics, Twenty-Three Years and Still Waiting for Change: Why It s Time to Give Tipped Workers the Regular Minimum Wage, July 2014, 4 National Restaurant Association, 2014 Restaurant Industry Forecast, January 2014, 5 Institute for Research on Labor and Employment, University of California-Berkeley, Waiting for Change: Is it Time to Increase the $2.13 Subminimum Wage?, December 2013, 6 Restaurant Opportunities Center United, The State of Tipped Workers, February 2014, 7 Ibid 3 8 Restaurant Opportunities Center United, Tipped Over the Edge: Gender Inequity in the Restaurant Industry, February 2012, 9 Ibid 3 10 Legal Services of New Jersey, The Real Cost of Living New Jersey, May 2013, 11 Ibid 8 12 Ibid 3 13 Ibid 8 8