Raising minimum wage doesn't work

The debate over minimum wage has become a super-local issue during the last few years. That's because politicians in several large cities have decided to push for local minimum wage increases instead of waiting for a federal hike. The center of that battle is in Seattle, where a phased-in process leading to a $15 minimum wage began April 1.

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The loudest opponents of the new law come from the restaurant and franchise restaurant industry. They've argued for months that the increased minimum wage will force them to increase prices, fire employees or cut employee hours, and even go out of business. But advocates for the wage hikes scoff at those claims and the next year is likely to be filled with lots of dueling statistics, dueling anecdotal stories, and generally a lot of yelling and screaming with neither side backing down.

Read MoreHow Seattle franchisees are fighting the $15 minimum wage

Whichever side you fall on, there is one undeniable casualty as a result of the minimum-wage hike in Seattle: tips.

The city's new rules say that employers can count tips against the minimum-wage requirement. On top of that, a tipped employee's minimum wage in Seattle is set at $10/hour, compared to $11 for everyone else. While this helps employers meet the new costs, it's likely to turn out to be a triple whammy for the waiters and waitresses who rely on tips:

More taxable income. The current federal minimum wage for tipped workers is just $2.13/hour. In Seattle, the minimum wage for tipped workers even before this "increase" was much more than that, but it was still less than $10/hour. Either way, that first $10 in tips for workers will now become part of a more reportable and taxable income when it used to be a cash-in-pocket payment.

Lower tips. The dining public in Seattle is well aware of the minimum-wage hikes and is seeing this as a "raise" in tipped workers' pay as opposed to a de facto reduction in their income. Many restaurant workers are already reporting reductions in tips as customers take all of this into account.

Math. Employers now have a massive new burden of calculating volatile tip income for each worker and keeping very accurate records and making those gap payments when workers don't reach the $10/hour threshold.

Simply put, this makes it harder for even honest employers to pay their tipped workers accurately and in a timely fashion. And anyone who knows how the real world works knows that when you make it harder to do something, it often doesn't get done. This is not just a hypothetical scenario. All of the major labor activist groups across the country have long argued that tipped workers are more likely to be illegally underpaid. When business is down, they argue, there's a huge incentive for employers not to make up the wage difference for their employees. There are hundreds of documented cases of businesses doing just that.

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Meanwhile, that failed "we're from the government and we're here to help" reality in Seattle is now in danger of spreading to the much larger city of Los Angeles. L.A.'s restaurant owners are pushing hard for a similar tipped-income offset to the newly proposed $13.25 to $15.25 minimum wage the L.A. city council is currently considering. And the restaurant owners may win this fight because L.A. Mayor Eric Garcetti is already on record supporting a California state assembly bill that would count tips toward meeting minimum pay requirements. In other words, the push to supposedly raise minimum pay in Los Angeles has a great chance of bringing down a long-standing California law that made working as a tipped employee much more lucrative.

And it's really a bad thing to mess with tipping, because tipping is one of the few remaining ways the customer and the actual person providing a service can relate to one another in a truly free market sense. It's empowering for everyone involved in the transaction. I may not have any control over what my waiter's minimum pay from his employer is, but tipping gives me the power to be the primary source of my waiter's income during the time he's serving me and my family.

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The waiter may not be able to improve his base salary more than once or twice a year no matter how well he works. But every time he serves a customer he has an excellent chance of being rewarded more financially for making an extra effort. It's an unwritten contract between the two of us that more often than not results in me getting very good service and the waiter getting a financial boost for doing so. It's a terrible thing to reduce the financial effectiveness of tips because of rules imposed by an outside party who is not the customer, the service provider, or even that service provider's employer. In this case, that outside party is the government.

Maybe we should make our elected leaders work only for tips from the real voters.

Commentary by Jake Novak, supervising producer of "Power Lunch." Follow him on Twitter @jakejakeny.