Introduction to Microeconomics (Lecture 12: Labor and Unions) Murray N. Rothbard

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Introduction to Microeconomics (Lecture 10: Government Cartels) Murray N. Rothbard

Thomas Sowell – The Ethnic Flaw 1984 2/2

Policies to Energize the United States Economy Lee Ohanian

Walter Williams Suffers No Fools

Tullock Lecture: Richard Epstein

The role of greater equality in post-war economic growth (a one-time growth spurt from less misallocation of talent?)

What happened when a restaurant chain abolished tipping?

Joe’s Crab Shack tested a no-tip model in 18 of its 130 restaurants. A 12-15% service charge replaced tips. Joe’s Crab capture is the first major restaurant chain to experiment with a tipping policy to experiment with abolishing it. The tipping minimum wage is far less than the federal, state and local minimum wages.

Joe’s Crab Shack had high hopes. The aims were customers would pay less, get a greater value experience, reduce labour costs and increase profits. The reactionary left represented by Salon and Huffington Post have quite strong views on tipping. Salon says

Tipping is a repugnant custom. It’s bad for consumers and terrible for workers. It perpetuates racism. Tipping isn’t even good for restaurants, because the legal morass surrounding gratuities results in scores of expensive lawsuits.

Tipping does not incentivize hard work. The factors that correlate most strongly to tip size have virtually nothing to do with the quality of service. Credit card tips are larger than cash tips. Large parties with sizable bills leave disproportionately small tips.

We tip servers more if they tell us their names, touch us on the arm, or draw smiley faces on our checks. Quality of service has a laughably small impact on tip size.

According to a 2000 study, a customer’s assessment of the server’s work only accounts for between 1 and 5 percent of the variation in tips at a restaurant.

Salon adds that federal and state law requires restaurants to ensure that tips bring employees up to minimum wage, but few diners know that.

Huffington Post managed to marshal 9 reasons why tipping should be abolished arguing that it was in no one’s interests either employers, employees or customers. The old efficiency at wage argument was rolled out arguing that employers gain in terms of diligent motivate employees by paying a straight wage rather than leaving it up to customer judgements of the services tended.

Not surprisingly this sounded like a business opportunity to Joe’s Crab Shack. Better customer service, better motivated employees and lower labour costs were promised by abolishing tips. You wonder why tipping survived in competition against alternative forms of restaurant service formats for all these decades?

Well, Joe’s Crab Shack got more than it bargained for when it abolished tipping. The pilot restaurants lost an average of 8-10% of customers during the test run.

The restaurant’s research showed that around 60% of customers disliked the policy because it took away an incentive for good service and that they don’t necessarily trust that management is passing along the money to workers.

The no tipping structure worked at four restaurants and will continue to work out why it succeeded there but failed at 14 other places.

What is even more interesting that the abolition of tipping lead to some workers quitting. This outcome at Joe’s Crab Shack is inconsistent with the notion that tipping is a by-product of the inequality of bargaining power between workers and employees. Turnover is supposed to reduce when tipping is abolished rather than increase with the employer losing their best workers.

Lazear found in data for Safelite Glass that average productivity will rise and the firm will attract a more able workforce will rise when it shifts to piece rates. The 44% increase in output per worker suggested the firm previously had a suboptimal compensation system. Half of the increase in labour productivity came from workers quitting when piece rates are introduced and being replaced by workers motivated to apply by the lure of piece rates. The average worker received a 10% increase in pay as a result of the switch to piece rates.

The only economic analysis of any value on tipping was written in 1985 by David Sisk at the Federal Trade Commission. He wrote a paper about both tipping and commissions. Sisk approached tipping not as a motivational device but a form of contracting.

Sisk points out that tipping takes the place of reputation as a way of guaranteeing good services are at a restaurant. Many do not plan to return to a restaurant  so an alternative form of contracting emerges to ensure good service because the threat of taking future custom elsewhere does not work.

In the case of a tip, the buyer (or customer) is provided with a final means of automatic redress which serves to prevent unsatisfactory performance on the part of the seller.

The possibility of unsatisfactory performance arises when the brand-name, repeat purchase mechanism is not effective or because employees of the seller are too costly to monitor.

An example is tourists. They are protected from inferior service relative to the locals because they pay tips too and are well able to judge good and bad service.

Sisk argues that once a customer sits down at a restaurant, the customer commits ever increasing amounts of time and the restaurant commits ever increasing amounts of physical resources. As one commits more irrevocable resources, the greater is the incentive of the other to renege on the contract.

A tip allows the customer to withhold a portion of the price without further negotiation. The tip serves to protect the customer from bad service and to protect the restaurant from bad service by an errant employee

The system of tipping provides the motivation for the waiter to properly identify and accommodate the individual desires of customers subject to the profit maximizing constraint of the restaurant owner…

The tip protects the buyer from exploitation by a seller (when the brand-name mechanism is insufficient) or from exploitation by the shirking employees of the seller

The worst tippers are single males; the best are couples and groups. The biggest tippers are single males on a date.

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Source: OkCupid, A woman’s advantage.

What % of each occupation needs a license or certificate in the USA?

The 2015 Current Population Survey in the USA added a question about whether you needed a licence or a certificate to practice your occupation. One in 4 Americans say they need a licence or certificate. 22.4% need a license and 3.1% need a certificate among employed over the age of 16 in the USA.

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Source: Bureau of Labour Statistics, Labor Force Statistics from the Current Population Survey (2015), Certification and licensing status of the employed by occupation Table 5.

This estimate of 25% is less than the 30% estimated by Kleiner and Vorotnikov (2015) using a Harris Poll. Kleiner and Vorotnikov (2015) also found that some American states regulate twice as many occupations as others. This diversity in federalism strains any public interest explanation of occupational regulation.

Occupational regulation is more likely to be an issue for those who finished further education. It would have been better if the estimate by the Bureau of Labour Statistics was for adults and not have included teenagers.

The purpose of occupational regulation is to protect buyers from quacks and lemons – to overcome asymmetric information about the quality of the provider of the service.

The main issue with quacks in the labour market is whether there is a large cost of less than average quality service, and is there a sub-market who will buy less than average quality products in the presence of competing sellers competing on the basis of quality assurance. This demand for assurance creates opportunities for entrepreneurs to profit by providing assurance of quality.

Mostly disciplinary investigations and deregistrations under the auspices of occupational regulation are for gross misconduct and criminal convictions rather than the shading of quality.

% of workforce requiring license or certification by state– Corrected

Some American states regulate twice as many occupations as others. This diversity in federalism strains any public interest explanation of occupational regulation.

Source: Reforming Occupational Licensing Policies | The Hamilton Project – Kleiner and Vorotnikov (2015), based on an analysis of data from a Harris poll of 9,850 individuals conducted in the first half of 2013 (Harris Poll Interactive 2013).

The purpose of occupational regulation is to protect buyers from quacks and lemons – to overcome asymmetric information about the quality of the provider of the service.

Adverse selection occurs when the seller knows more than the buyer about the true quality of the product or service on offer. This can make it difficult for the two people to do business together. Buyers cannot tell the good from the bad products on offer so many they do not buy to all and withdraw from the market.

Any entrepreneur who finds ways of providing credible assurances of the quality of this service or work stands to profit handsomely. Brand names and warranties are examples of market generated institutions that overcome these information gaps through screening and signalling.

Screening is the less informed party’s effort, usually the buyer, to learn the information that the more informed party has. Successful screens have the characteristic that it is unprofitable for bad types of sellers to mimic the behaviour of good types. Signalling is an informed party’s effort, usually the seller, to communicate information to the less informed party.

The main issue with quacks in the labour market is whether there is a large cost of less than average quality service, and is there a sub-market who will buy less than average quality products in the presence of competing sellers competing on the basis of quality assurance. This demand for assurance creates opportunities for entrepreneurs to profit by providing assurance.

Mostly disciplinary investigations and deregistrations under the auspices of occupational regulation are for gross misconduct and criminal convictions rather than the shading of quality.

Where is it easiest to start a business?