The owner is under paying for the labor and the customer, in turn, is over paying for the labor.

This is due to information asymmetry.

The employer is only paying the legal minimum, in the case of tipped wages in the U.S., $2.13. The employee is expected to make up the rest of the federal/state minimum wage in tips. But that's what they're incentivized to do. If you've got a short sighted view of finances, you may think that if you manage to cut costs, that always translates to extra profit. And if you're paying a dime more than minimum wage, you can cut that cost. (Also, this is why a lot of restaurants fail, most people who run them shouldn't be running a business)

The customer is obligated by social pressure and what not to tip for the service provided. However, people in the service industry are cagey about how much they pull in, actual effort required, etc. in order to get people to tip more and more. Originally, tipping was around 10% and now we see people trying to promote the idea that a baseline tip is closer to 25%.

So the customer has no clue as to how to price the labor that's been provided to them and it is in the servers' best interest to exaggerate as much as possible to get the most tip possible. That's what they're incentivized to do.

And inbetween it all, you have the servers. Who don't want to let go of the tipping model because they can manage to get paid better than what the actual service would be worth in a fairer market.