Thinking through this, kind of out loud.

Let's just take restaurants as an example. You say "tips allow employers to pay under market rate," but that can't be the case as a matter of logic. The market rate is _defined_ by what employers pay employees-employers as a whole simply can't all be paying below market wages or else the market rate would just be lower.

Perhaps you mean, "less than the market rate for similarly skilled labor in non-tipped sectors" (shoe sales, as an off+handed example). The question then becomes, "are the workers' skills in these sectors transferrable? Could workers simply change jobs if offered higher wages elsewhere?"

If so, then it follows that we can assume that the negatives you mentioned, like lower wages and less predictability, would drive workers out of the tipped sector and into the non-tipped sector. This would drive wages back up in the tipped sector. We don't see that.

What I think we see, and I admit this is a little anecdotal, is that restaurants (in healthy markets) are quite easily able to fill their positions. In fact, there's competition _for_ the positions amongst workers.

The fundamental rule to keep in mind is that if workers are being underpayed, they would simply change their​ line of work, driving wages up as the of supply of labor thinned. But what we see is that on the low-ends of both markets, wages generally stick to the minimum wage.

If tips were suddenly​ outlawed, do you think that restaurant wages would skyrocket to $30/hr? That's roughly the equivalent of 4 $40 tables with an 18% tip. I don't think so, because workers from other sectors would flood in from other sectors causing the wage to be pushed back down. A new equilibrium would probably be found somewhere just above the going rate in non-tipped sectors. If anything, tipping probably lowers wages for non-tipped employees more than the tipped ones.

I think the more interesting experiment would be to see how take home pay would be affected in a "tip-only" restaurant. In most, places around the country, the minimum wage for tipped positions is ~$6/hr. Losing that would be like losing one ~$33 table. On the employer's side, they would gain ~$9 back when you account for payroll taxes. I think what we'd see is that most of that wouldn't just be pocketed by the employer, it would probably go back into the restaurant in the form of better ingredients, materials, marketing, and/or additional staff, all in hopes of increasing the number of tables turned overall. Non-luxury restaurant profits are driven by tables turned, not the price of each plate. E.G. hiring an extra busboy or dishwasher might help you turn over more tables more quickly, increasing restaurant profits and also the number of tips earned by the servers.

I don't know, this is all an interesting thought experiment.

In general, I'm pretty wary of "employers pay workers less by taking advantage of X" arguments. Unless it's poor government policy distorting the labor market or something like a recession, labor markets probably function like any other market. Supply and demand still reigns king. Underpaying employers will have a hard time keeping employees. Highly skilled workers in any sector will sell their talent to the highest bidder.