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Tipping is a practice that originated after the Civil War to reward good service. It became more common after the Fair Labor Standards Act allowed owners to adjust wages based on expected tips. Tipping puts the responsibility of paying workers onto consumers, leading to increased costs and reduced spending. It also creates unpredictable income for workers and gives all power to customers. However, tipping can lead to higher quality service and increased earnings for workers. It can also have positive effects on people's mental health. Tipping has evolved from a reward to an expectation and has a significant impact on the economy. The velocity of money increases when more people touch and interact with a single dollar. Tipping is seen as almost required in the current economy, but it has become widespread in many industries. Have you ever wondered where your tips go? In today's episode of Insider Economics, we will do a deep dive into tipping, where it comes from, why we do it, and the effect on the economy at large. Nowadays, it seems like everywhere we go, there are extra charges to calculate in. We must pay taxes, extra fees on top of certain things, and most confusingly, tips. While researching for this episode, we interviewed Chris Anderson. It feels like we are required to tip everywhere and anywhere we go. Why is that? Tipping originated after the Civil War, when people would reward a good service. The practice continued until 1938, where the Fair Labor Standards Act was passed. The FSLA allowed owners to adjust wages based on expected tips and let the customer take the responsibility. It then became normal for people of color to not receive tips and led them to being paid wages significantly below what was needed to live. This continued until the Jim Crow laws were abolished, where it became a much less common trend. So what happens when you tip? When you tip, you are essentially paying a part of that worker's income. Corporations drop the responsibility of paying workers onto consumers. According to MinimumWage.com, the federal tipped minimum wage is $2.13, and workers reported making $15.51 in 2020. The average tip rate has been going up, according to ResearchGate.net, as the tips minimum wage has been going down, according to ObamaWhiteHouse.Archives. This means consumers pay most of the workers' income. Corporations avoid paying wages, and consumers have increased costs. This encourages consumers to go out less and spend less. Pymin.com states that 17% of consumers of all income groups have reduced their spending to account for increased tipping expenses. 6% of consumers have reduced their spending on food at table service restaurants, and 49% in quick service restaurants, where tipping is being encouraged. Along with this, 27% and 26% have restricted their budgets for hotels and rideshare services. 22% have curbed clothing spending. This isn't the only problem, though, as tipping creates an unpredictable income and makes it difficult to plan finances for workers. It also puts all power into customers' hands, and they can still choose to provide little to no tip, even for excellent service, which is bad for the worker. While tipping seems like a lose-lose for customers and workers, there are benefits that come along with modern tipping culture. Tipping leads to increased efficiency and higher quality of service at establishments where it is considered customary. People like servers are inclined to provide good service, knowing their tip depends on the quality of that service. According to ResearchGate.net, average tips have increased from 14% to 19% since 2000, while reported earnings have risen 61% in that same time frame. Tipping can also be good for people's mental health. In a book titled Passions Within Reason, The Strategic Role of the Emotions, a behavioral economic book by Robert H. Frank, he shares some interesting benefits of tipping. Robert talks about how people are more likely to succeed in the long run when they choose to make these compassionate choices and can view themselves more positively. Additionally, it's important to recognize that when we are confident, we tend to be more successful in our endeavors. We need more of these successful and confident people who gain that confidence by sharing their love and appreciation with others. Tipping is an interesting economic concept because it has different pros and cons for every group in the economy and the economy as a whole. It has evolved from a reward to an expectation. Tipping culture is crazy, but it has a huge impact on money flow throughout the economy. As the velocity of money, how many people touch and interact with a single dollar, increases which makes the economy healthier. So, Ethan, how do you feel about tipping? I think that in the current economy and with social cues, tipping is almost required. And it feels really bad when you don't tip because you know the workers are being paid very little. Additionally, tipping increased all my costs, food and otherwise, which is something to be taken into consideration. Yeah, I agree with you. It's awkward when an electric screen is shoved into your face asking for a tip when all they did was scoop ice cream for you. Obviously, when going to a restaurant, I believe you should tip, but I feel that tipping has become too widespread in too many industries. That's it for today's episode. Thanks for tuning in. Make sure you keep those brains sharp and we'll see you all next week. Bum ba da bum bum bum.