Should the minimum wage be lower for workers who get tipped? Two states are set to decide

Mel Nichols, a 37-year-old bartender in Phoenix, Arizona, takes home anywhere from $30 to $50 an hour with tips included. But the uncertainty of how much she's going to make on a daily basis is a constant source of stress.

“For every good day, there's three bad days,” said Nichols, who has been in the service industry since she was a teenager. “You have no security when it comes to knowing how much you're going to make.”

That uncertainty exists largely because federal labor law allows businesses to pay tipped workers, like food servers, bartenders and bellhops, less than the minimum wage as long as customer tips make up the difference. Voters in Arizona and Massachusetts will decide in November whether it's good policy to continue to let employers pass some of their labor costs to consumers.

The ballot measures reflect an accelerating debate over the so-called subminimum wage, which advocates say is essential to the sustainability of the service industry and detractors say pushes the cost of labor off employers' shoulders and leads to the exploitation of workers.

The amount tipped workers make varies by state. Fourteen states pay the federal minimum, or just above $2 an hour for tipped workers and $7 an hour for non-tipped workers.

Arizona employers can pay their tipped workers $3 less hourly than other workers. Under current rates, that means tipped workers' base pay is $11.35 an hour.

Voters will decide whether to approve a measure backed by state Republicans and the Arizona Restaurant Association to change the minimum for tipped workers to 25% less than the regular minimum wage as long as their pay with tips is $2 above that minimum.

The hourly minimum wage in Arizona is currently $14.35 and increases yearly according to inflation.

Voters in Massachusetts are being asked to eliminate the tiered minimum-wage system.

There, voters will decide on a measure to incrementally increase the state’s tipped worker wage — currently $6.75 per hour — until it meets the regular minimum wage by January 2029. The measure was put forward by One Fair Wage, a not-for-profit that works to end the subminimum wage.

If voters approve the measure, the Bay State would join seven states that currently have a single minimum wage. Michigan will soon join that group after an August state Supreme Court ruling initiated a phase-out of the subminimum wage.

“When you’re not making the money that you should be making to pay your bills, it becomes hard on you,” said James Ford, a longtime Detroit-based hospitality worker. ”(The ruling) makes me think we’re moving forward.”

Other states have wage measures on the ballot. In California, voters will choose whether to raise the hourly minimum wage from $16 to $18 by 2026 in what would be the highest statewide minimum wage in the country. Measures in Alaska and Missouri would gradually raise minimum wages to $15 an hour while also requiring paid sick leave.

In the last two years, Washington, D.C., and Chicago also have started to eliminate the subminimum wage.

Employers must ensure that workers get the full minimum if they don't make that much with tips. But they don't always comply with federal labor law. One in 10 restaurants and bars investigated nationally by the U.S. Labor Department between 2010 and 2019 violated a provision of the Fair Labor Standards Act, resulting in the establishments paying $113.9 million in back wages.

The issue disproportionately affects women, who make up about 47% of the U.S. workforce but nearly 70% of those who work in tipped professions, according to an AP analysis of U.S. Census data.

In Arizona, Republican state Sen. J.D. Mesnard, the sponsor of Proposition 138, said the measure is a win for both businesses and lower-wage workers.

“The employer is protected in the sense that they can preserve this lower base, knowing that there are going to be tips on top of it,” Mesnard said. “The tipped worker is guaranteed to make more than minimum wage, which is more than they’re guaranteed today.”

Nichols doesn't support it.

“It would reduce my hourly, and anything that reduces my hourly is not something that I want to lean into,” she said. “I don’t believe that business owners need any more cuts in labor costs.”

Proposition 138 was initially put forward as a response to a ballot measure pushed by One Fair Wage that would create a single minimum wage of $18, but the group abandoned the effort after threats of litigation from the restaurant association over how it collected signatures.

Instead, One Fair Wage will focus on trying to pass a wage hike in the Legislature. Democratic State Rep. Mariana Sandoval said she hopes her party in November can flip the Legislature, where Republicans hold a one-seat majority in both chambers.

After working for tips for more than 20 years, server Lindsay Ruck, who works at a restaurant at Phoenix Sky Harbor International Airport, said she’s faced her fair share of belligerent customers. But because their tips make up such a significant part of her pay — approximately $60 an hour — she’s hesitant to stand up to them.

To Ruck, higher base pay -- not less -- is called for.

“I think that there should be just a single minimum wage and then people should get tipped on top of that,” Ruck said.

The National Restaurant Association and its state affiliates warn of reduced hours, lower employment and menu price hikes if employers can’t rely on tips to pay their workers. That’s why Dan Piacquadio, a co-owner of Harold’s Cave Creek Corral restaurant outside Phoenix, is hoping voters pass Proposition 138.

“This is just a way to protect our current system that’s been there for 20 years and protect restaurant owners, keep restaurants affordable, and most importantly, keep very good pay for all tipped workers,” Piacquadio said.

Between 2012 and 2019, the number of restaurants and people employed at those restaurants grew at a faster clip in the seven states that have a single minimum wage compared to states that pay the federal minimum tipped wage, according to labor economist Sylvia Allegretto.

“We are sitting here in a state that has a $16 minimum wage,” Allegretto said from Oakland, California, where she works at the left-leaning Center for Economic and Policy Research. “No subminimum wage, and we’ve got a thriving restaurant industry.”

The front entrance of Harold's Cave Creek Corral, regarding Arizona Prop 138 on minimum wage Thursday, Oct. 3, 2024, in Cave Creek, Ariz. (AP Photo/Ross D. Franklin)

Patrons sit at the bar for lunch at Harold's Cave Creek Corral, regarding Arizona Prop 138 on minimum wage Thursday, Oct. 3, 2024, in Cave Creek, Ariz. (AP Photo/Ross D. Franklin)

Dan Piacquadio, owner of Harold's Cave Creek Corral, pauses at the restaurant's concert stage as he awaits the results of the upcoming election results regarding Arizona Prop 138 on minimum wage Thursday, Oct. 3, 2024, in Cave Creek, Ariz. (AP Photo/Ross D. Franklin)

Dan Piacquadio, owner of Harold's Cave Creek Corral, poses for a photograph in his restaurant as he is very interested in the upcoming election and the results of Arizona Prop 138 on minimum wage Thursday, Oct. 3, 2024, in Cave Creek, Ariz. (AP Photo/Ross D. Franklin)

Dan Piacquadio, left, owner of Harold's Cave Creek Corral, waits to talk with chef and kitchen manager Lucio Osorno as he works in the kitchen as Piacquadio waits for the upcoming election and the results of Arizona Prop 138 on minimum wage Thursday, Oct. 3, 2024, in Cave Creek, Ariz. (AP Photo/Ross D. Franklin)

Dan Piacquadio, owner of Harold's Cave Creek Corral, checks for reservations at the entrance of the restaurant as he waits for the upcoming election regarding Arizona Prop 138 on minimum wage Thursday, Oct. 3, 2024, in Cave Creek, Ariz. (AP Photo/Ross D. Franklin)

Dan Piacquadio, owner of Harold's Cave Creek Corral, stands at the front register as he is awaiting the results regarding Arizona Prop 138 on minimum wage Thursday, Oct. 3, 2024, in Cave Creek, Ariz. (AP Photo/Ross D. Franklin)

Dan Piacquadio, owner of Harold's Cave Creek Corral, poses for a photograph in his restaurant as he speaks about Arizona Prop 138 on minimum wage Thursday, Oct. 3, 2024, in Cave Creek, Ariz. (AP Photo/Ross D. Franklin)

Lindsay Ruck, a server at Phoenix Sky Harbor International Airport restaurants, pauses in Terminal 3 as she works for minimum wage plus tips and is interested in the upcoming election and the Arizona Prop 138 on minimum wage vote Thursday, Oct. 3, 2024, in Phoenix. (AP Photo/Ross D. Franklin)

Lindsay Ruck, a server at Phoenix Sky Harbor International Airport restaurants, pauses in Terminal 3 as she works for minimum wage plus tips and is interested in the upcoming election and the Arizona Prop 138 on minimum wage vote Thursday, Oct. 3, 2024, in Phoenix. (AP Photo/Ross D. Franklin)

Lindsay Ruck, a server at Phoenix Sky Harbor International Airport restaurants, pauses in Terminal 3 as she is anticipates the vote on Arizona Prop 138 on minimum wage Thursday, Oct. 3, 2024, in Phoenix. (AP Photo/Ross D. Franklin)

On top of the grievous toll in human life and misery, Israel's war against the Hamas and Hezbollah militant groups has been expensive, and the painfully high financial costs are raising concerns about the long-term effect of the fighting on the country's economy.

Military spending has ballooned, and growth has stalled, especially in dangerous border areas that were evacuated. Economists say the country could face declining investment and higher taxes as the war strains government budgets and forces tough choices between social programs and the military.

Here is a look at the monetary costs Israel faces as a result of the conflict:

The Israeli government is spending much more per month on the military, from $1.8 billion before Hamas started the fighting by attacking Israel on Oct. 7, 2023, to around $4.7 billion by the end of last year, according to the Stockholm International Peace Research Institute.

The government spent $27.5 billion on the military last year, according to the institute, ranking 15th globally behind Poland but ahead of Canada and Spain, all of which have larger populations. Military spending as a percentage of annual economic output was 5.3%, compared with 3.4% for the United States and 1.5% for Germany. That pales in comparison to Ukraine, which spent 37% of its GDP and more than half its entire government budget on fighting off Russia’s invasion.

In the three months after Hamas attacked, Israel's economic output shrank 5.6%, the worst performance of any of the 38 countries in the Organization for Economic Cooperation and Development, a group of mostly rich nations.

The economy partly rebounded with growth of 4% in the first part of this year but grew only 0.2% in the second quarter.

The war has inflicted an even heavier toll on Gaza’s already broken economy, where 90% of the population has been displaced and the vast majority of the workforce is unemployed. The West Bank economy has also been hit hard, where tens of thousands of Palestinian laborers lost their jobs in Israel after Oct. 7 and Israeli military raids and checkpoints have hindered movement. The World Bank says the West Bank economy contracted by 25% in the first quarter.

In Israel, the war has imposed many economic burdens. Call-ups and extensions of military service threaten to crimp the labor supply. Security worries deter investment in new business, and disruptions in flights have kept many visitors away, cutting into the tourism industry.

Meanwhile, the government is paying for housing for thousands of people who had to leave their homes in the south near the border with Gaza and in the north where they were exposed to fire from Hezbollah.

One of the biggest concerns is the open-ended nature of the fighting, which has lasted more than a year. Israel's economy rebounded quickly from a 2006 war with Hezbollah in southern Lebanon. But that conflict lasted only 34 days.

Moody's Ratings cited that idea on Sept. 27, when it lowered the Israeli government's credit rating, two notches. The Baa1 rating is still considered investment grade, albeit with moderate risk, according to Moody’s.

Israel's economy is hardly collapsing. The country has a diversified, highly developed economy with a strong information-technology sector, which supports tax revenues and defense spending. Unemployment is low, and the TA-35 stock index is up 10.5% on the year.

Even amid the fighting, tech companies raised some $2.5 billion in capital during the third quarter, according to Zvi Eckstein, head of the Aaron Institute for Economic Policy at Reichman University.

Israel started the war “in the best economic condition” regarding government debt, which stood at a relatively modest 60% of GDP, Eckstein said. “We financed the war mainly with debt,” which has now risen to 62% but is still contained compared with France at 111% and in line with Germany at 63.5%.

The institute foresees debt reaching 80% of GDP, assuming the fighting does not markedly intensify and some sort of cease-fire or conclusion can be reached by the end of next year. Even then, higher defense spending is likely, especially if Israel maintains a military presence in Gaza after the war.

Israeli Finance Minister Bezalel Smotrich’s budget for 2025 foresees a deficit of below 4%, saying that will ensure that Israel’s debt burden remains stable. Smotrich said the country has a stable shekel currency, rising share prices, a tight jobs market, strong tax revenues and access to credit, and a rebounding tech sector.

Moody’s questioned the deficit figures, forecasting a 6% deficit for next year.

The credit downgrade will lead to higher borrowing costs, meaning Israelis are likely to see cuts to public services and higher taxes, said Karnit Flug, a former head of Israel’s central bank and now vice president of research at the Israel Democracy Institute.

Before the war, American military aid to Israel amounted to around $3.8 billion per year under a deal signed during President Barack Obama's administration. That comes to roughly 14% of Israel’s prewar military spending, much of which goes to U.S. defense companies.

Since the war in Gaza began and led to escalating conflict across the Middle East, the United States has spent a record of at least $17.9 billion on military aid to Israel, according to a report for Brown University’s Costs of War project that was released on the anniversary of the Hamas attacks on Israel.

Beyond strictly military aid, the U.S. has offered critical financial support for Israel during times of trouble. Congress in 2003 approved $9 billion in credit guarantees that let Israel borrow at affordable rates after the economy suffered during the so-called second intifada, or Palestinian uprising.

Some of those guarantees remain unused and could in theory be tapped to stabilize government finances if Israel faces unaffordable borrowing costs.

The government has convened a commission under former acting national security adviser Jacob Nagel, who negotiated Israel’s most recent U.S. aid package, to offer recommendations on the size of the future defense budget and to assess how increased defense spending could affect the economy.

Economist Eckstein said a budget that includes some tax increases and cuts in social spending would be needed to support a postwar rebound and pay for likely higher ongoing defense costs.

Find more coverage at https://apnews.com/hub/mideast-wars

FILE - Israeli soldiers take positions near the border with Gaza in southern Israel, on Dec. 11, 2023. (AP Photo/Ohad Zwigenberg, File)

FILE - Israeli soldiers work on tanks in northern Israel on Sept. 27, 2024. (AP Photo/Baz Ratner, File)

FILE - An oil platform in Israel's offshore Leviathan gas field is seen while an Israeli navy vessel patrols the Mediterranean Sea, Israel, on Sept. 20, 2024. (AP Photo/Ariel Schalit, File)

FILE - People at the beach in Tel Aviv, Israel, on Sept. 25, 2024. (AP Photo/Ohad Zwigenberg, File)

FILE - People sit in a bar overlooking the Mediterranean Sea at the old port of Jaffa, a mixed Jewish-Arab part of Tel Aviv, Israel, on April 26, 2024. (AP Photo/Oded Balilty, File)

FILE - A man carry breads on a board over his head at the Mahane Yehuda market in Jerusalem, on March 6, 2024. (AP Photo/Leo Correa, File)

A woman buys fruit in a local market in Haifa, Israel, on Aug. 16, 2024. (AP Photo/Leo Correa)

FILE - Cars sit at the port of Haifa, Israel, on Aug. 15, 2024. (AP Photo/Leo Correa, File)

FILE - Gantry cranes used to load and unload cargo containers from ships sit stand during the dawn, in the port of Haifa, Israel, on Aug. 15, 2024. (AP Photo/Leo Correa, File)

FILE - Israeli soldiers fire a mortar shell from southern Israel towards the Gaza Strip, in a position near the Israel-Gaza border , on Jan. 3, 2024. (AP Photo/Leo Correa, File)

FILE - Israeli soldiers from the artillery unit store tank shells in a staging area at the Israeli-Gaza border in southern Israel, on Jan. 1, 2024. (AP Photo/Leo Correa, File)

FILE - The Israeli Iron Dome air defense system fires to intercept an attack from Lebanon over the Galilee region as seen from the Israeli-annexed Golan Heights, on Aug. 4, 2024. (AP Photo/Leo Correa, File)

FILE - Israeli soldiers work on tanks in a staging area in northern Israel near the Israel-Lebanon border, on Oct. 1, 2024. (AP Photo/Baz Ratner, File)