239. The No-Tipping Point

The restaurant business model is warped: kitchen wages are too low to hire cooks, while diners are put in charge of paying the waitstaff. So what happens if you eliminate tipping, raise menu prices, and redistribute the wealth? New York restaurant maverick Danny Meyer is about to find out.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Stephen J. Dubner?

  Freakonomics Radio is sponsored by Southern New Hampshire University. The best investments are the ones you make in yourself, and no one knows that better than Southern New Hampshire University. With more than 200 online degree programs, no set class times, and low online tuition, Southern New Hampshire University is built to fit your life today and set you up for success tomorrow. Education is an investment. Why not make it a smart one? Apply for free at SNHU.edu/freakonomics. Freakonomics Radio is sponsored by Progressive. Whoever says saving money is hard doesn't know that new customers who bundle and save with Progressive save hundreds, because switching your home and auto insurance is better than

• 0:43Stephen J. Dubner?

  cutting down on the things you love, like those iced lattes that help you get ready to face the day. So, switch your home and auto to Progressive and see if you could save and keep sipping away. Get your quote today at progressive.com. Progressive Casualty Insurance Company affiliates and other insurers. Not available in all states. Freakonomics Radio is sponsored by PNC Bank. Boring. Great word, bad rep. Yet, time and time again, here at Freakonomics, we find that when something culture-changing happens, boring things like calculations and careful planning are usually behind it. Which begs the question, why not apply it to other aspects of life? Like banking, for example?

• 1:26Stephen J. Dubner?

  Well, PNC Bank did since its inception, proving time and again that the best banking strategy isn't the exciting type, but the steady, reliable, definitely-not-Yolo type. PNC Bank: Brilliantly boring since 1865. Brilliantly boring since 1865 is a registered mark of the PNC Financial Services Group, Inc. PNC Bank, National Association, Member FDIC.

• 1:54Stephen J. Dubner?

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• 2:30Speaker 01

  The American menu price structure is completely false, but we've been taught to believe that it's real.

• 2:39Stephen J. Dubner?

  That is Danny Meyer.

• 2:40Speaker 01

  And what's happened is that every menu price you see, obviously, includes every single thing except paying your server.

• 2:48Stephen J. Dubner?

  Meyer is one of the most successful restaurateurs of his generation.

• 2:52Speaker 01

  And so, we have been conditioned, after many, many years as consumers, to believe that the $25 chicken entree is $25. And then, when we add the tip, we truly feel like it came out of a different pocket, and we don't put that calculus into it.

• 3:09Stephen J. Dubner?

  Meyer does not like this two-pocket idea, and so...

• 3:13Speaker 01

  We're now asking people to shift that long-held thinking and to take it out of one pocket. It's the same math, but it's a very different emotional calculus.

• 3:24Stephen J. Dubner?

  Today on Freakonomics Radio, remaking the restaurant business model from the inside out, because it needs remaking.

• 3:31Speaker 01

  We were actually co-conspirators in a system that was completely unsustainable.

• 3:38Stephen J. Dubner?

  And the restaurant business is already hard enough.

• 3:41Speaker 02

  Restaurants don't make a lot of money. There's a lot of expenses that I think people overlook when they think about how restaurants actually operate.

• 3:48Stephen J. Dubner?

  Things get even harder when you can't find enough chefs to work for the going rate.

• 3:53Speaker 02

  We're about 14 cooks short in the kitchen, which is about 50% of our staff.

• 3:57Stephen J. Dubner?

  Because if you want to make good money working in a restaurant, wouldn't you rather work in the dining room, getting those fat tips?

• 4:04Speaker 03

  I think somewhere in the realm of, say, $1,000 a week before taxes.

• 4:09Stephen J. Dubner?

  So what happens when you eliminate tipping?

• 4:13Speaker 03

  They'll say, so I don't tip then, right? I'm like, absolutely, it's all taken care of. Hospitality is included. What about coat check? Coat check is also included.

• 4:21Stephen J. Dubner?

  It's a restaurant revolution by a man who's been revolutionizing restaurants since the beginning.

• 4:26Speaker 01

  Another restaurateur was actually quoted as saying, I wish that Danny Meyer had never come along because he's actually turned our customers into complete freaks, where they think they can get away with anything. And it's like, are you kidding me?

• 4:54Speaker 04

  From WNYC Studios, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 5:11Stephen J. Dubner?

  The Modern is the restaurant on the ground floor of the Museum of Modern Art in New York. It recently got its second Michelin star under executive chef Abram Bissel.

• 5:20Speaker 02

  Have a great service!

• 5:22Stephen J. Dubner?

  Yay! We spent some time at The Modern not long ago with Bissel, with a server slash bartender, with the general manager, and with El Jefe, Danny Meyer. Eating, of course.

• 5:34Speaker 05

  That looks pretty good.

• 5:35Speaker 01

  Thank you. Looks great.

• 5:37Speaker 05

  Tart flamme with onions, bacon, and a carrot rizette, over rice toast, a little bit of dill, and roast radish.

• 5:44Speaker 01

  And I'm going to urge you to go first for the tart flamme. Because it's better hot? Yep. Okay, I shall. Thank you.

• 5:50Stephen J. Dubner?

  Meyer is CEO of the Union Square Hospitality Group, which includes some of New York's favorite restaurants: The Modern, Gramercy Tavern, Myalino, the Blue Smoke barbecue joints. Union Square also traffics in private dining, sports arena catering, museum cafes. It also launched Shake Shack, which has gone international and public with a current market cap of roughly $1.5 billion. So to say that Danny Meyer is kind of a big deal in the restaurant world, well, he is. He's a big deal. He opened his first restaurant, Union Square Cafe, in 1985, when he was 27.

• 6:29Speaker 01

  Had you trained at all as a chef? Had you worked in restaurants at all by this point? No, never. Not at all? You'd eaten in restaurants? Eaten in restaurants. No family? Anybody in your family had restaurants? Well, my dad was in the travel business back in St. Louis, but his... What does that mean, "in the travel business"? So, it meant a lot of different things.

• 6:48Stephen J. Dubner?

  Among the things it meant, designing driving tours through the French countryside for Americans who were embracing the European way of life.

• 6:56Speaker 01

  There was always French spoken at the table, especially when my parents didn't want us to know what they were talking about. There was always a bottle of wine on the table. And I got an early opportunity to connect to this world, which then, when I was seven years old, we got to go to France and I kept a journal.

• 7:13Stephen J. Dubner?

  From the outset, Meyer saw restaurants as much more than a place to just buy a meal.

• 7:18Speaker 01

  You know, we are social creatures, and there's only so much socializing we can or want to do at home.

• 7:26Stephen J. Dubner?

  So, yes, he'd be in the food business, but primarily in the hospitality business.

• 7:31Speaker 01

  It just struck me as being so odd that there was this adversarial relationship that had been created between restaurant goers and restaurateurs, as if the restaurant didn't want you to be happy. And it just blows my mind that whether it starts with the reservation-making process or whether the chef is willing to make a substitution for something that, you know, you don't love on that dish. Like, I'd rather have mashed potatoes than sauteed carrots with my chicken. And the chef says, "No, we don't do it that way." I just never understood that.

• 8:06Stephen J. Dubner?

  The New York Times described Union Square Cafe as "a place where, quote, 'fine dining finally lost its haughty attitude.'" The restaurant gave customers comment cards, not something that nice restaurants typically did. And in 1990, Meyer banned smoking at Union Square Cafe, more than a decade before it became law in New York.

• 8:26Speaker 01

  Everyone was saying, "You're crazy. You're gonna put yourself out of business. No one's gonna ever eat there again." And we only got busier. And I take some strength from that because I'm hearing some of those same choruses of people saying, "You're crazy to eliminate tipping at The Modern and at your other restaurants because you're gonna put yourself out of business."

• 8:49Stephen J. Dubner?

  Meyer's anti-tipping stance goes back a long time, at least in 1994, when he floated the idea in the Union Square Cafe's newsletter. "The American system of tipping," he wrote, "is awkward for all parties involved."

• 9:04Speaker 01

  I believe that hospitality is a team sport. And in the same way as if you went to a soccer game, the ticket you bought would include the seat, but it wouldn't only include the strikers and not the goalie. And expect you to pay the goalie separate based on what you as a fan thought of the goalie's performance or the defender's performance that game. And so, in the restaurant business, we've had this economic policy that apparently dates back to the Civil War, which is where people got paid $0 by the restaurant, which basically means that the waiters are working not for me, but for you as freelancers.

• 9:48Stephen J. Dubner?

  A few years ago, we put out an episode of Freakonomics Radio called "Should Tipping Be Banned?" We noted that the American model of tipping, not just in restaurants, but in all kinds of service jobs, is hardly the global norm. And as the Icelandic business professor Magnus Torfason told us, "It is not a norm worth emulating."

• 10:09Stephen J. Dubner?

  The more tipping you see in a given country, the more corruption you generally see in that country as well. Tipping in restaurants is particularly problematic. Not only because it lies in some weird gray zone between optional and mandatory, not only because it lets a restaurant pay its waitstaff well below the minimum wage while making the customer responsible for the difference, but also because, as Michael Lin from the Cornell School of Hotel Management explained, tipping can be discriminatory.

• 10:43Speaker 06

  Attractive waitresses get better tips than less attractive waitresses. Slender women get better tips than heavier women. Both groups, blacks and whites, will tip a white server more than a black server. And that's even controlling for perceptions of service quality. It's discriminatory.

• 11:01Stephen J. Dubner?

  So what would Michael Lin do about tipping?

• 11:04Speaker 06

  You know, I think I would outlaw it.

• 11:08Stephen J. Dubner?

  Danny Meyer had his own set of reasons for wanting to get rid of tipping, primarily economic reasons.

• 11:14Speaker 01

  I'll tell you that one of the motivating factors was really believing that we were actually co-conspirators in a system that was completely unsustainable.

• 11:29Stephen J. Dubner?

  OK, this requires some unpacking, some explaining about the economics of the restaurant business. You probably already know that most restaurants don't succeed. 60% fail within their first three years, although that's not much worse than for any independent business. There's also the relatively low profit margin in restaurants.

• 11:48Speaker 02

  About 7%.

• 11:50Stephen J. Dubner?

  Sorry?

• 11:50Speaker 02

  7%.

• 11:52Stephen J. Dubner?

  That's Abram Bissel, the executive chef at The Modern, one of the most beloved and best-reviewed restaurants in New York, which earns just 7 cents for every dollar it takes in.

• 12:03Speaker 02

  Restaurants don't make a lot of money. The profit margin, I mean, from the plates to the tables to just keeping the lights on, there's a lot of expenses that I think people overlook when they think about how restaurants actually operate. But definitely our largest expense is labor, is the physical people in it.

• 12:21Stephen J. Dubner?

  This is where it gets interesting. There are two large categories of employees, the waitstaff, who take care of the customers, and the kitchen staff, who prepare the food. They're generally called front-of-the-house and back-of-the-house employees. Now, ask yourself a question. Which job is harder? Well, both jobs are hard in a number of ways, but would you say that working front of the house is way, way, way, way harder than working in the kitchen? Or that it requires much more qualification or experience? Probably not. And yet, that might be the conclusion you'd reach if you looked at the two groups' paychecks.

• 12:59Speaker 07

  The discrepancy between the culinary team and the front of house team has grown more and more over time.

• 13:06Stephen J. Dubner?

  That's Simon King.

• 13:08Speaker 07

  I'm the general manager at The Model.

• 13:09Stephen J. Dubner?

  And general manager means you do what exactly?

• 13:13Speaker 07

  I'm responsible for every aspect of it. So regarding the business, the finance, the people, the leadership, the direction, the creativity.

• 13:21Stephen J. Dubner?

  So this growing wage discrepancy between back and front of the house.

• 13:26Speaker 07

  Quite alarming statistic that in a period of time since Danny's had Union Square Cafe, in that 30 years, the front of house salary has increased by over 300%. In that same period of time, the culinary team is in the mid 20s or the early 20%. I mean, that is colossal difference.

• 13:54Stephen J. Dubner?

  Where did this massive wage discrepancy come from? One big factor: tipping. Since tipping is based on a percentage of the bill, front of the house compensation rises when restaurant prices rise. And restaurant prices have risen, especially at high-end places like The Modern. Bissell again.

• 14:13Speaker 02

  We went through a huge evolution in food over the last 10, 15 years, where people demanded higher-quality ingredients. It was no longer that we were trying to ask people to eat organic and locally sourced, but it started to become, I will only eat organic and locally sourced. So that started to drive prices of menus up. A server has made better money over the years as the price of food has gone up. It just hasn't balanced out between the back. And I think a lot of it's, if you can't physically see what's going on in the kitchen, you don't see those people and you don't necessarily understand the way that the restaurant works.

• 14:46Stephen J. Dubner?

  And Danny Meyer.

• 14:47Speaker 01

  But I also think it's really important to understand that while it's wonderful that if you order a $100 bottle of wine and you're a 20% tipper, the waiter's going to make $20 as opposed for you pulling the same cork that the guy on the next table only bought a $40 bottle of wine and his server gets $8 for that. What about the cook in the kitchen?

• 15:11Stephen J. Dubner?

  That makes the exact same dollars whether we served 300 people tonight, 200 people tonight, whether he shaved white truffles over your pasta or Parmigiano over your pasta. There's just something that's not right.

• 15:28Stephen J. Dubner?

  So at a place like The Modern, where the average bill is around $50 per person for lunch and $100 for dinner, you can make a lot of money waiting tables. In the kitchen? Not so much. Abern Bissel again.

• 15:42Speaker 02

  Yeah, for 10 years, it had been the same pay rate.

• 15:46Stephen J. Dubner?

  And then give a sense of the disparity in wages between front of house and back of the house.

• 15:50Speaker 02

  Well, I mean, we say there was a 300% difference between a senior level, so someone that would be actually serving the food, a server level or a captain level in our restaurant, and a senior level cook. So someone that was cooking, let's say, meat or fish, a roast.

• 16:05Stephen J. Dubner?

  So a senior cook might have been earning 50 grand a year and the senior server...

• 16:09Speaker 02

  Senior cook was more like about 24.

• 16:11Stephen J. Dubner?

  No.

• 16:12Speaker 02

  So we were at a definite breaking point in the industry, and that had been the same for almost a decade.

• 16:18Stephen J. Dubner?

  How good do you have to be to be a senior cook at a restaurant like this? How much training and experience, I mean?

• 16:23Speaker 02

  Yeah, I think you have to have a certain amount of natural talent, but a lot of it is experience. So I would say about five years of professional New York City cooking.

• 16:31Stephen J. Dubner?

  How do you find even one person in New York who's that good to work at a restaurant like this and pay him 24 grand, much less more than one, presumably?

• 16:40Speaker 02

  It's very hard. This last summer, we were in one of the worst strouts we've been in. We were about 14 cooks short in the kitchen, which is about 50% of our staff short in the kitchen at one time. And that doesn't change how we operate. We're still a full restaurant.

• 16:55Stephen J. Dubner?

  So when there's a cook shortage like that, what is the cause of that? Does it mean that people don't exist out there that have the skills? Or that for the wage that you were offering, you just couldn't get people in the door?

• 17:04Speaker 02

  I think it's a little bit of both. We were up at CIA recently.

• 17:08Stephen J. Dubner?

  That is the Culinary Institute of America, not the Central Intelligence Agency.

• 17:13Speaker 02

  And they still have the same amount of students graduating that they did five years ago.

• 17:17Stephen J. Dubner?

  Well, it may be true that CIA is graduating the same number of chefs. There are a lot more cooking schools than there used to be and a lot more graduates.

• 17:26Speaker 03

  I think in the post-Food Network world, I think there are a lot more sort of educated people who are pursuing that maybe right out of college. Like, it's become a very sexy enterprise.

• 17:38Stephen J. Dubner?

  That's Pamela Vishon, who works at The Modern.

• 17:41Speaker 03

  So I am half and half a server and a bartender here.

• 17:44Stephen J. Dubner?

  Okay.

• 17:45Speaker 03

  And I was the same at a previous Danny Meyer restaurant.

• 17:47Stephen J. Dubner?

  Which one?

• 17:48Speaker 03

  Blue Smoke.

• 17:49Stephen J. Dubner?

  Vishon did not set out to be a front of the house employee. She went to culinary school and planned to work in kitchens.

• 17:55Speaker 03

  So culinary school is a six-month certificate program. It's called the Institute of Culinary Education. But that is designed to be a short certificate program, not a degree program. Like, if you go to the CIA, you get a two-year associate's degree at minimum, and you can even pursue a bachelor's degree there.

• 18:08Stephen J. Dubner?

  And you can spend a lot of money doing that.

• 18:10Speaker 03

  Exactly. So my six-month program was a $30,000 enterprise.

• 18:13Stephen J. Dubner?

  No way.

• 18:15Speaker 03

  Yeah. And that is a great value culinary school, quite frankly, for the what you get.

• 18:19Stephen J. Dubner?

  It just makes me think that we're in, not necessarily a culinary school bubble,

• 18:24Speaker 03

  Right.

• 18:24Stephen J. Dubner?

  but like, all events have conspired to make that a really, really, really good business. People worry about for-profit colleges generally.

• 18:33Speaker 03

  Right.

• 18:33Stephen J. Dubner?

  But 30 grand for six months.

• 18:35Speaker 03

  To enter at a field that historically pays $11 or $9 an hour right out of the gate.

• 18:42Stephen J. Dubner?

  Vishon's first job out of culinary school was in the kitchen at Gramercy Tavern, yet another Danny Meyer restaurant.

• 18:49Speaker 03

  And I enjoyed that, and it was a valuable experience. But I thought, wow, I'm working, it's much, much harder work, and it is significantly less pay.

• 18:57Stephen J. Dubner?

  Which led her to move from back of the house to the front.

• 19:01Speaker 03

  And I think that you won't find a front of house employee in the city who doesn't think that this is an unfortunate divide between front and back in house in terms of how hard they work and how it's impossible for them to benefit from tips.

• 19:18Stephen J. Dubner?

  And this is the central dilemma that Danny Meyer's no-tipping crusade is meant to address.

• 19:24Speaker 01

  I'm basically just trying to shift the economics because there's unfortunately a law that states that tips, while they may be shared amongst every server in the restaurant, may not be shared.

• 19:37Speaker 01

  With anyone who does not spend at least 80% of their time face to face with you.

• 19:42Stephen J. Dubner?

  That is a New York state law. It varies by state. In any case, in New York, the waitstaff may pool their tips, which evens things out from one front of the house worker to the next, but legally, those tips can't be shared with the kitchen workers, which creates two distinct categories of restaurant employee. The ones up front, who collectively profit from the generous tipping activity of customers who've been well-trained to leave 15 or 20 or 25% of the bill, and the employees in the back, who, despite spending a lot of time and money to acquire their skills, and despite working very, very hard, make a relatively low fixed salary.

• 20:22Speaker 01

  When I learned a statistic that for the first time in my entire career, that we had more culinary grads working in the dining room than in the kitchen, that was the moment when I said, that has to stop because they didn't go to cooking school to be servers.

• 20:39Stephen J. Dubner?

  So you've got a huge wage discrepancy in a business that's already barely turning a profit. Some employees are making plenty of money, but because their money comes primarily out of customers' pockets, you can't redistribute that money where you need to, in the kitchen, which makes it hard to attract and retain kitchen staff. For years, Danny Meyer and his colleagues looked for ways to make up for this wage imbalance without raising menu prices even further.

• 21:06Speaker 01

  We looked at benefits. We looked at any possible way we could do this. So for example, we were offering extra discounts to dine in our restaurants. Well, that backfired because while it's all well and good to say you can have 20% off or 40% off to eat in one of our restaurants, I can't even afford to pay my rent. So thanks a lot for giving me a discount on something I can't afford anyway. Then we tried another benefit, which was... To buy Metro cards for people who worked in the kitchen so that at least they wouldn't have to reach into their pocket with post-tax dollars to pay for transportation. We've always offered health insurance. We've always offered

• 21:47Speaker 01

  life insurance. We also instituted two years ago a matching 401k plan. But then we started to learn that, once again, it's nice of you guys to offer to match what I'm putting into my own retirement, but I can't even afford to put anything into my own retirement. So I don't even qualify.

• 22:04Stephen J. Dubner?

  Abram Bissell describes the other cost savings they tried to find at The Modern. Flowers, for instance.

• 22:09Speaker 02

  Our arrangements are almost two feet shorter than they were, and that's a substantial savings over a year.

• 22:16Stephen J. Dubner?

  And also.

• 22:17Speaker 02

  Buying things in bulk, buying our glassware in bulk four times a year saves a little bit. There's all kinds of things like slimming down the actual amount of items on the menu, making the menus a little bit smaller, less products actually brings those costs down as well.

• 22:31Stephen J. Dubner?

  But none of these small changes could fix the big problem. To Danny Meyer, the big problem was, by now, obvious.

• 22:39Speaker 01

  We just knew we had to go cold turkey on this whole tipping thing.

• 22:48Stephen J. Dubner?

  Coming up after the break, going cold turkey on tipping means upsetting the waitstaff, doesn't it?

• 22:55Speaker 01

  You're wrong.

• 22:57Stephen J. Dubner?

  And if you want to catch up on earlier Freakonomics Radio episodes, like, Should Tipping Be Banned? Or the one called, Is It OK for Restaurants to Racially Profile Their Employees? You can check out our archive at Freakonomics.com or on iTunes, where you can also subscribe to this podcast. And if you can find it in your heart to do so, give us a nice rating or review. Thanks.

• 23:31Stephen J. Dubner?

  Freakonomics Radio, sponsored by Southern New Hampshire University. The best investments are the ones you make in yourself, and no one knows that better than Southern New Hampshire University. With more than 200 online degree programs, no set class times, and low online tuition, Southern New Hampshire University is built to fit your life today and set you up for success tomorrow. Education is an investment. Why not make it a smart one? Apply for free at SNHU.edu/freakonomics. Freakonomics Radio is sponsored by Progressive. Whoever says saving money is hard doesn't know that new customers who bundle and save with Progressive save hundreds, because switching your home and auto insurance is better than

• 24:14Stephen J. Dubner?

  cutting down on the things you love, like those iced lattes that help you get ready to face the day. So, switch your home and auto to Progressive and see if you could save and keep sipping away. Get your quote today at progressive.com. Progressive Casualty Insurance Company affiliates and other insurers. Not available in all states. Freakonomics Radio is sponsored by hotels.com. Hotels.com helps you find and book the right stay for work faster. With business preferences, save your travel must haves, like gym access or breakfast, just once, then get tailored results whenever you search for work travel. Plus, with a free membership, you can save up to 20% on hotels and earn rewards on every stay for future travel.

• 24:59Stephen J. Dubner?

  Book now at hotels.com. Visit hotels.com for details. Danny Meyer, CEO of the Union Square Hospitality Group, decided that one of his highest-profile restaurants, The Modern, would eliminate tipping in favor of a pricing model called Hospitality Included, or HI. The decision was driven primarily by economics, with a side serving of social justice.

• 25:33Speaker 01

  So it's one thing for me to say that our company stands for enlightened hospitality, meaning taking care of our team even before taking care of our guests. But increasingly, as the cost of living kept going up in New York City, especially relative to debt that a lot of cooks had from going to culinary school, what was occurring to us is that we were doing a pretty good job of taking care of half of our team and a pretty awful job of taking care of the other half. And the tipping system, which prevents tips from being shared with cooks, unfortunately, is part of the problem. But we were part of the problem by sustaining the tipping system.

• 26:17Stephen J. Dubner?

  The Modern was hardly the first or only restaurant in America to get rid of tipping, but, given Meyer's high profile and the fact that he also created the fast food nirvana Shake Shack, a non-tipping restaurant by nature, his decision got massive media coverage.

• 26:33Speaker 08

  These days, some restaurants are serving up your favorite meals and saying, "Hold the gratuity." Restaurant legend Danny Meyer this morning plans to take tipping off the menu.

• 26:42Speaker 09

  Stop tipping. To skip the tip. Tipping will soon be off the table at all 13 Union Square Hospitality Group restaurants.

• 26:50Stephen J. Dubner?

  There were all kinds of questions. How much would the restaurant have to raise prices in order to pay its waitstaff what they were losing in tips? How much of a raise would kitchen workers get? Would servers now earn a lot less? And if so, wouldn't they all just quit? Would customers get the service they were used to if they didn't retain the leverage of the tip? There were so many questions that Union Square Hospitality held a town hall meeting, open to the public. This was in November, a few weeks before the policy would take hold at The Modern. Union Square's chief restaurant officer, Sabato Sagaria, talked about the new HI menu prices.

• 27:28Speaker 10

  So the true cost of dining in one of our restaurants will be represented in that price. And that price is going to vary in terms of how much it's been marked up. So some of the items, like a cup of coffee, is still going to be priced like a cup of coffee today, and others will go up at varying rates. But the main thing to know is that when you get that check at the bottom, that amount that you're reaching in your wallet, in your pocket to pull out your wallet, is going to be about the same as it is today.

• 27:52Stephen J. Dubner?

  The same as it is today, meaning that the new hospitality-included price should equal roughly what the customer used to pay, once you added a tip. Now, how would employee wages at the Modern be affected? The lowest paying kitchen jobs, washing dishes, cleaning floors and so on, would rise to $12 an hour, up from less than $10. Cooks would now start at $14 an hour. And what about front of the house? Here's Erin Moran, Union Square's chief cultural officer.

• 28:23Speaker 11

  Our dining room team will be receiving a base hourly wage of $9 an hour, up from $5 an hour from the tipped minimum wage. And in addition to that, we will be implementing what we're calling a revenue share program, which essentially means that we will be allocating a portion of our revenues and distributing them to our dining room teams, in addition to their base compensation of $9 an hour.

• 28:49Stephen J. Dubner?

  Which presumably would make whole the waiters and waitresses while also paying the kitchen more fairly, which might help reduce some of the traditional tension between those two groups. There were other potential upsides of HI to consider. Customers wouldn't have to feel that extra money is being extracted from them at the end of the meal and even at the coat check. Here's Danny Meyer.

• 29:11Speaker 01

  I'm really happy I don't have to fish in my wallet for dollar bills and buy my coat back for the 80th time.

• 29:18Stephen J. Dubner?

  And if you're a server, no longer are you so financially reliant on the kindness of strangers, or worried that an off night in the restaurant means an off night for your wallet. Simon King, general manager of the Modern, also saw HI as a way to smooth out the inevitable rough edges of waiting tables, like fighting for shifts on Thursday, Friday and Saturday nights.

• 29:41Speaker 07

  So for years, people have worked those nights, never had a chance to have a weekend off because they needed to work on a Saturday to make their wage. And now, you can work Monday to Friday if you want to. You can work lunches and not have to work all these nights and still receive the same money or very similar to before. It's a colossal change. Some may decide the busy nights is for them. Others may say, well, you know what? Having a night with my child, tucking my child to bed is something I've never done. It may be something trivia, a lot of people take for granted. It's something, for me, very special.

• 30:20Stephen J. Dubner?

  When we first visited the Modern in December, the new hospitality included pricing had started just a few weeks earlier. Pamela Vashon is the front of house employee we heard from earlier.

• 30:29Speaker 01

  So were you making more or less?

• 30:31Speaker 03

  It feels like making the same. So certainly in terms of pay, obviously, it's a new system. I think that there are still a few things to iron out. On the old system, your length of your shift didn't really have a factor in terms of how you or anyone else got paid out of the tip pool. Whereas in the HI system, there is a multiplier that takes into account how many hours you've worked. So the value of our shares under the revenue share system can increase or decrease depending on how well they manage the staff on the floor.

• 31:00Stephen J. Dubner?

  I asked Simon King what he'd seen so far.

• 31:02Speaker 01

  So give me the early report. Who likes it? Who's ambivalent? Who doesn't like it?

• 31:07Speaker 07

  I think on the whole, we were prepared for all kinds of reactions from the public. It's such a cultural part of American way of life. It would be naive of us to think it wouldn't be such a big deal. And it is a bold move. But it's pleasant surprise for us was the best compliment I had from the very first couple of days from my team was, and it was just like another busy day, actually, Simon. It wasn't anything different. I mean, that's probably the best comment we had. Granted, there are some few individuals that prefer the old system, some reluctant to change, but the vast majority have really embraced it.

• 31:43Stephen J. Dubner?

  And we talked to executive chef Abram Bissel.

• 31:46Speaker 01

  What are you hearing from other chefs?

• 31:48Speaker 02

  Does it work?

• 31:49Speaker 01

  And what do you tell them?

• 31:51Speaker 02

  It absolutely does.

• 31:56Stephen J. Dubner?

  Danny Meyer, as the ultimate boss, who is also responsible to Union Square Hospitality Group's investors, was not ready to make any grand conclusions.

• 32:06Speaker 01

  I'd say it's probably too soon to tell, but so far, so good. It's got to prove itself out business-wise.

• 32:13Stephen J. Dubner?

  But Meyer did promise to check back in with us later, once the hospitality included pricing wasn't so brand new, to see if there'd been a waitstaff walkout or maybe a customer revolt over the higher menu prices. So we spoke with him again in early February.

• 32:27Speaker 01

  As of today, I have one piece of good news, which is that December of 2015...

• 32:35Speaker 01

  Where the Modern had instituted hospitality included for five or six weeks at that point, December 2015 was the most profitable December the Modern has ever had, and that was with hospitality included. And all of our leaders and all of our restaurants are actually clamoring to be next. They all want to do this because they've seen some pretty compelling statistics.

• 32:59Stephen J. Dubner?

  Let me just be pure devil's advocate for a minute. So if you tell me that in the first complete month after HI was instituted, that you had that that was your most profitable month or your most profitable December, did you say, or most profitable month?

• 33:13Speaker 01

  Both.

• 33:14Stephen J. Dubner?

  Both, okay. So the devil in me might say, well, that makes perfect sense because you raised your prices to make up for the lack of tipping, and it makes perfect sense that you're able to be more profitable then. And the only potential loser in that scenario is the customer who might be paying a little bit more, or the front of the house server, who I would have to assume is making less, but tell me if I'm wrong.

• 33:41Speaker 01

  You're wrong. Happy to tell you that. No, because as a matter of fact, if the very, very first constituent we wanted to take care of were the people who work for us, we were not looking to take from one pocket and put it into the other. So the true cost to us of doing all the things we want to do, which is to increase the hourly compensation of our kitchen cooks by almost 20%, to keep our waitstaff at least whole, and we guaranteed our waitstaff that for at least the first three months, we would keep them whole relative to exactly what they would have made under the old system. That's very easy to do. That's just math. We know exactly what our revenues are. We knew that before we made this shift, on average at the Modern, a guest would leave

• 34:26Speaker 01

  21% gratuity. So what we decided to do was to keep our waiters whole, raise our opening manager's compensation to at least $50,000, and pay our cooks $2 more an hour. And so you say, well, so how's this all working? And why is the guest not paying too much? And the only way I can explain it to you, because I never would have guessed we would already be profitable this early on, we thought this would be a long slog and that we would ultimately be more profitable by doing the right thing because we would have less turnover, we would have more applicants, a better product that more people would want to come try. The only answer I can give you as to why this happened so quickly is that The Modern

• 35:08Speaker 01

  of all of our restaurants has been the beneficiary of unprecedented public relations associated with the initiation of hospitality included. And so, the number of people eating at The Modern this year, relative to any other year, in the month of December, which is already your busiest month, was dramatically higher than any other December we've had. And I've got to feel that the just unprecedented amount of notice about hospitality included encouraged more people than ever to come road test it.

• 35:40Stephen J. Dubner?

  So, that is an unbelievably interesting and delicious irony, that coverage of the restaurant that was instituting, you know, big time no tipping draws enough customers to the restaurant that the no tipping policy becomes a second tier story to the fact that it just works. But, I mean, now, now, let me say this, and I say this with the utmost admiration. People are sort of talking about you as if you're Mother Teresa, as if you've cured cancer, whereas in fact, really, all you've basically done is turned an optional charge into a set charge when you eat at a restaurant. It's not that big a deal, really, is it?

• 36:24Speaker 01

  I am no Mother Teresa, although, in one respect, I am.

• 36:28Stephen J. Dubner?

  That was only rhetorical.

• 36:29Speaker 01

  No, but in one respect, I am, because I would say that this is an example that I, I hope many businesses try to set, which is that doing the right thing is the most profitable thing. And I'm completely comfortable saying that we really, really hope that this turns out to have been a very smart business move. Look, I can tell you that in the very, very short time that we've been doing this, job applications in the kitchen have gone up 270% on average for the whole time. Now, we were facing an average of minus 50% for the previous seven months. So, we couldn't hire cooks. What about servers, the category of people?

• 37:14Speaker 01

  That we were most concerned about because we all know that servers are only nice to you in expectation of getting a big tip. What if I were to tell you that our server applicant pool over the last four months at the Modern has grown 25% the first month, 100% the second month, and in the most recent month, the applicant pool has grown by 215%. And at the same time, turnover in those three months has already gone down in both categories. So we're really, really excited about this. We think that this is something that's time and others are going to follow.

• 37:54Speaker 01

  In fact, since you and I first spoke, a good five really important restaurateurs and chefs in New York City alone, not to mention throughout the country, have already announced that they're shifting.

• 38:07Stephen J. Dubner?

  Since hospitality included, has the average check, which now includes hospitality, gone up or down or stayed flat compared to the average old check with the tip included?

• 38:20Speaker 01

  It's been just about exactly the same. And that, Stephen, that's the reason that we thought this was going to take longer to turn into a profitable structure because the way we calculated things as we were planning this out, we really thought that the total cost of doing everything we wanted to do for staff members was north of 30%, somewhere north of 30%. But we also knew that if your credit card bill at the end of the month was basically 10 percentage points higher than it would have been if you were a 20% tipper, that you would feel that and you might just think twice about coming back to the restaurant. And we also follow the open table feedback we get, and we've noted quite happily that

• 39:03Speaker 01

  the average of all of the Modern experiences, both for food and for service, have gone up about, I'm trying to see, 12% since we've instituted hospitality quotient.

• 39:18Stephen J. Dubner?

  Danny, you acknowledge that the Modern benefited from the coverage of its move to hospitality included or no tipping. What about other restaurants that want to try this and won't get the coverage, which is to say just about all of them, maybe especially restaurants that have a less affluent clientele and lower prices? How do you think this will work for them?

• 39:37Speaker 01

  Well, we're going to find that out ourselves because I want you to know, we are those restaurants. Remember, we did not roll this out in all of our restaurants. We only rolled it out at the Modern. And we, just like everybody else, are waiting to see how it goes. So, the next restaurant we picked, which is Myolino, does not have the same kind of check average as the Modern has, and also serves breakfast, for example, which the Modern doesn't serve. So, we're going to see, how does this work in the morning time? How does it work at a very, very active, less expensive bar with snacks that are open all day? And like all the other restaurants you're asking about, Myolino is not going to get

• 40:20Speaker 01

  the same four-month amount of global press coverage that the Modern got. So, we'll find out, but I'm really confident about it.

• 40:38Stephen J. Dubner?

  So, let me make sure I understand this. You said that at the Modern, you guaranteed front-of-house staff a salary equivalent to their old salary that had tips for a three-month period.

• 40:48Speaker 01

  Yeah, let's just be careful. We call it compensation because when it's an hourly worker, it's actually legally not considered a salary, but compensation.

• 40:56Stephen J. Dubner?

  Do you suspect as of now that you will be able to continue that guarantee?

• 41:00Speaker 01

  Not sure. Not sure. We're right now trying to ask ourselves, well, so which are the dates where we had to pony up extra? Which are the dates where the new system actually paid them even more? And then, of course, because it's winter, you've got to correct for things like... Closing on the Blizzard a couple Saturdays ago, which actually was a big win for people because on a day when there would have been tipping and you closed the restaurant, nobody would have come in and gotten anything. And so it's too soon to tell is really the best answer I can give you. But I will tell you that if we weren't feeling so confident that not only is the waitstaff and formerly tipped employee pool doing well, but that we can make this work for the

• 41:44Speaker 01

  business, we never would have pulled the lever and said, let's go to a second restaurant.

• 41:49Stephen J. Dubner?

  So the Front of House, for the time being, is making roughly what they were making before. You said that you have increased kitchen salaries by about 20%. You said that applications for both are up. My question is, what about the relationship between kitchen and Front of House, I guess, before and after? Kitchen was, in just about everybody's view, underpaid. And how has that changed at the modern? And how does that affect, I guess, you know, the customer?

• 42:19Speaker 01

  Well, you're asking a fantastic question because there's a couple of things that are hard to measure economically, but they get to the core of why we did this in the first place. The first one, speak to waiters who have undergone this change. And what you hear from them is, even apart from the economics, I feel better coming to work. And the two reasons that they have most told us is that they love the fact that there's just no longer this bubble hanging over their head during the course of your meal where they're wondering and you're wondering, is the only reason I'm being nice to this guy so, you know, so I can pick his pocket at the end of the meal. They love getting rid of that. They love the dynamic that

• 43:04Speaker 01

  suggests that they're doing it because they are a hospitality professional. And that feels really, really good to them. The other thing that our servers love is that they don't have to feel guilty at the end of an incredibly busy Friday or Saturday night when they're all high-fiving, but only behind closed doors because they don't want the kitchen staff who only worked harder for the exact same amount of money to feel bad about it. So everybody just kind of emotionally is loving the fact that we can be transparent.

• 43:41Stephen J. Dubner?

  For someone so enmeshed in every dimension of his restaurants, it's worth noting that Danny Meyer almost did not end up in the restaurant business at all. Over lunch at The Modern back in December, he was telling me about his early days in New York. He had thought about becoming a journalist, maybe getting into politics. Then he started making a lot of money as a salesman at a company that sold electronic tags to stop shoplifters. But he decided that was not his destiny. Finally, he decided he would become a lawyer. Started making plans for law school, and he was prepping for the LSATs.

• 44:16Speaker 01

  And literally on the eve of taking my LSAT, I was out to dinner with my aunt and uncle and my grandmother here in the city at an Italian restaurant that I still go back to for inspiration called Elio's. And everyone was having a great time, drinking wine and eating pasta, except for me. And my uncle turns to me and he said, "Why the, why the long face? What's going on?" And I said, "'Cause I've got to take my LSATs tomorrow." And he said, "Well, you want to be a lawyer, of course you got to take your..." "What's wrong?" And I said, "The problem is I don't want to be a lawyer." And he basically dropped his fork. And he said, "Do you realize how long you're going to be dead?" And I said, "No, why?" And he said, "I don't know either, but a hell of a lot longer than you're going to be alive.

• 45:01Speaker 01

  Why in the world would you do something you don't want to do?" And I said, "'Cause I don't know what else I would do." And he said, "What are you talking about? You don't know what else you would do." "All I've ever heard come out of your mouth your entire life is how much you love restaurants." I said, "So, should I go eat in restaurants for the rest of my life?" "No, no, fool. You should go open a restaurant." And it just had never occurred to me.

• 45:41Stephen J. Dubner?

  Next week on Freakonomics Radio, it's campaign season in America. And even though the US economy is relatively healthy, the prognosis given by most candidates is somewhere between dire and fatal.

• 45:54Speaker 12

  This country is in big trouble. We don't win anymore. We lose to China. We lose to Mexico, both in trade and at the border. We lose to everybody.

• 46:03Speaker 13

  The middle class needs a raise. More good jobs, jobs that pay enough for a family to live on.

• 46:13Stephen J. Dubner?

  Are these economic ills as bad as we're told? And more important, what are the causes? Are they permanent or temporary? We hear from one economist whose answer may surprise you. The data give an unambiguous answer that we had. Whoa, whoa, whoa. You think we're just going to give you the answer like that? Check it out next week on Freakonomics Radio. Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Kasia Mahalovich and Erva Gunja. Our staff also includes Jake Howitt, Merritt Jacob, Christopher Wirth, Greg Rosalsky, Alison Hockenberry, and Caroline English.

• 46:56Stephen J. Dubner?

  You can find all our previous episodes at Freakonomics.com. You can also subscribe to this podcast on iTunes or wherever you get your podcasts.

• 47:26Stephen J. Dubner?

  Freakonomics Radio is sponsored by EverPure. Is the value of AI not living up to the promise? The problem is probably your data, not your AI models. When it's scattered across different systems, getting your data AI-ready is a challenge. You keep your AI waiting and everything slows down. EverPure unifies your data so you can see it, understand it, and control it all from one simple place and get it AI-ready fast. Unlock the true value of your AI at everpuredata.com.

• 47:59Stephen J. Dubner?

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• 48:43Stephen J. Dubner?

  So they are looking ahead and investing $80 billion in infrastructure upgrades and are committed to fueling growth in ways that benefit all customers so that reliable and affordable energy is accessible for generations to come. Go to southerncompany.com to learn more. Southern Company, building the future of energy.

• 49:07Speaker 14

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