What Is Minimum Wage?
A minimum wage is the lowest wage that a worker may be paid per hour. It's a price floor on hourly wages mandated by federal law. Nonexempt workerscan't be offered a job or agree to work for less than this amount.
Key Takeaways
- The minimum wage is a legally mandated base pay for nonexempt hourly workers.
- The federal minimum wage in the United States as of 2024 is $7.25 per hour.
- States and local municipalities can set their own minimum wage rates but the state rate must be above the federal rate to qualify for this right.
- Twenty-two states increased their minimum wage effective January 2024.
Understanding Minimum Wage
Minimum wage laws were first introduced in Australia and New Zealand in an attempt to raise the income ofunskilled workers. Most modern developed economies as well as many developing economies enforce a national minimum wage.
The first minimum wage law in the United States went into effect in 1912 when Massachusetts set a minimum hourly rate for women and children under age 18.
The federal government established a minimum wage of $0.25 under the Fair Labor Standards Act (FLSA) in 1938. That wage was worth $5.48 as of the fourth quarter of 2023 if you adjust it for inflation.
The federal minimum wage rate in the United States is $7.25 per hour as of 2024 unless the worker falls into a category that's specifically exempted from FLSA.
The government periodically assesses the federal minimum wage level with changes ininflationor the cost of living and the rate has not increased since July 2009. The Fair Minimum Wage Act of 2007 ordered the minimum wage to be raised from $5.15 in three increments. It rose to $5.85, $6.55, and then finally to $7.25.
President Joe Biden campaigned on a promise to raise the federal minimum wage for government workers to $15 an hour. The Executive Order was signed on April 27, 2021 and was implemented on Jan. 30, 2022.
History of the Minimum Wage
The first minimum wage laws came into effect in the late 1800s when sweatshop labor was common in newly industrialized countries. Minimum wages were a central demand for the new union movement, along with shorter hours and better working conditions.
The first national minimum wage was enacted by New Zealand in 1894, followed by the United Kingdom in 1909.
Minimum wages were advocated by both labor organizers and consumer groups in the United States but they faced challenges from business interests. Several states attempted to pass minimum wage laws but they were rebuffed by a 1923 Supreme Court decision that declared minimum wage laws to be unconstitutional.
It wasn't until the New Deal that Congress finally enacted a federal minimum wage law. The Fair Labor Standards Act that was passed in 1938 set the minimum wage at $0.25 per hour. It may seem low but that wage provided a reasonably comfortable living for Depression-era families.
Federal Minimum Wage vs. State Minimum Wages
The United States enforces a federal minimum wage but individual states, cities, and localities can enact different minimum wage requirements provided that the stipulated hourly wage is not lower than the federal minimum wage. An employer who is subject to the federal and state minimum wage requirements must pay the higher of the two.
States usually set a minimum wage that is reflective of thecost of livingin the region. The state of Massachusetts has a minimum wage of $15 as of Jan. 1, 2024 and Montana has a minimum wage rate of $10.30 as of that date.
Minimum wage rates exceed the federal rate in 30 states and the District of Columbia as of January 2024. The District of Columbia has the highest minimum wage at $17 per hour. The second highest is Washington State at $16.28. New York and California are tied for third place at $16.
Only five states have not adopted a state minimum wage as of Jan. 1, 2024: Alabama, Louisiana, Mississippi, South Carolina, and Tennessee.
This map shows the minimum wage set at each state level. Seven states have no state minimum and two, Georgia and Wyoming, have a minimum wage less than that provided for at the federal level. In all cases, the federal minimum wage of $7.25 applies.
Some states have special exceptions to their minimum wage rules:
- Georgia and Wyoming both have a minimum wage of just $5.15 but employees covered under theFLSAare subject to the federal minimum wage of $7.25.
- Small employers in Minnesota with annual sales of less than $500,000 pay a minimum wage of $8.85 rather than the regular state minimum of $10.85.
- The minimum wage in Nevada is $1 less than the specified minimum if health benefits are included. A $12 minimum wage for all employees will replace the two-tier system in July 2024.
- The minimum wage in Oklahoma is $2 for employers with fewer than 10 full-time employees at any single location and for employers with $100,000 or less in annual gross sales regardless of their number of employees.
- Florida residents voted in November 2020 to increase the state’s minimum wage incrementally beginning at $10 per hour on Sept. 30, 2021 until it reaches $15 per hour in September 2026. It's at $12 as of Jan. 1, 2024.
- Residents of Nebraska passed legislation to raise the minimum wage there to $15 an hour in 2026, an increase of $6 over the $12.00 minimum in January 2024.
State Minimum Wages vs. Municipal Minimum Wages
Cities and municipalities within a state may set a higher minimum wage for residents who live in areas with higher costs of living. The city of Chicago has had a minimum wage of $15 or $15.80, depending on employer size, as of July 2023. The Illinois state minimum wage is $14 as of Jan. 1, 2024.
Minimum Wage Exceptions
Certain categories of workers are exempt from being covered by minimum wage laws.
Tipped Workers
Low-wage laborers in the United States can be exempt from the minimum wage if a sizable portion of their income is derived fromtips. A lower minimum wage of $2.13 per hour as of January 2024 may apply to tipped employees who regularly receive more than $30 in tips per month or if the total tips retained in addition to the hourly wage rate are equal to or greater than the federal minimum wage.
The employer is expected to compensate the employee for the shortfall if the employee’s total tips and hourly rate fall below the minimum wage.
Students
A full-time student working for a university, retail store, or service establishment cannot be paid less than 85% of the minimum wage. Students can work up to eight hours per day but they can't work more than 20 hours per week when school is in session. Students in technical or vocational programs can't be paid less than 75% of the minimum wage throughout their active enrollment in the program.
Employees Under 20 Years Old
Workers under the age of 20 may be paid $4.25 per hour by federal law until they pass a three-month probationary period. The employer must convert their pay structure to the federal minimum wage rate after that.
Workers With Physical or Mental Disabilities
Workers with physical or mental disabilities can be paid less than the federal minimum wage, according to theterms of the FLSA. Disabilities that can affect production capacity include blindness, cerebral palsy, alcohol and drug addiction, mental illness, and developmental disabilities.
The $15 Minimum Wage
Minimum wage laws were designed to end the exploitation of workforces and ensure that a country's working population doesn't fall below the poverty line. TheFair Labor Standards Act (FLSA) establishes the minimum wage affecting full-time and part-time workers in the private sector and federal, state, and local governments.
Debate surrounds the establishment of a $15 federal minimum wage. President Joe Biden’s American Rescue Plan attempted to raise the minimum but the Biden administration has so far only succeeded in raising the minimum hourly wage of government employees to $15.
Arguments for a $15 Minimum Wage
Proponents argue that an increase in the minimum wage helps meet the goal of a living wage where employees earn enough income for a satisfactorystandard of living. They also claim that a boost increases worker productivity, reduces income inequality, spurs economic growth, and improves employee retention.
$15 Per Hour
Many companies have increased their hourly rate to at least $15 per hour independent of a mandatory federal minimum wage increase. They include Bank of America, Amazon, Costco, Chipotle, CVS, and Starbucks.
Arguments Against a $15 Minimum Wage
Critics argue that companies, not the government, should decide how much their employees are paid and that a minimum wage doesn't always boost the spending power of a population and can instead lead to higher unemployment.
A small change in the price for low-wage labor could have a large effect on employer demand, they say, leading toincreasing unemploymentamong low-wage workers. Critics note that minimum wage laws may also lead to job outsourcing in which companies may decide to move their facilities to countries where labor costs are lower.
Minimum Wage vs. Living Wage
The minimum wage is sometimes contrasted with the living wage, an hourly salary that would allow someone to live comfortably if they are working full time. The minimum wage is established by law but a living wage is calculated based on factors such as average rents, costs of living, transportation, and childcare costs.
The federal minimum wage was much closer to a living wage when it was first established in 1938. The buying power of a minimum wage worker peaked in 1968, according to the Seattle Times. Inflation and price increases after that point caused the real earnings of a minimum wage worker to fall as productivity increased.
What Are Efficiency Wages?
Efficiency wages are the level of wages paid to workers above theminimum wageto retain a skilled and efficient workforce. Efficiency wage theory posits that an employer must pay its workers highly enough that workers are incentivized to be productive and that highly skilled workers don't quit.
Which State Has the Lowest Minimum Wage?
Georgia and Wyoming both have a minimum wage of just $5.15 but employers in these states that are subject to the Fair Labor Standards Act must pay their employees the $7.25 federal minimum wage. The same rules apply to the five states that have no minimum wage: Alabama, Louisiana, Mississippi, South Carolina, and Tennessee.
Is the Minimum Wage Meant to Be a Living Wage?
A living wage is the minimum income deemed necessary for a worker to meet their basic needs. The U.S. poverty level for a family of four was an income of $30,000 in 2023 which works out to $14.42 per hour, well above the minimum wage at the federal level. Critics argue that the federal minimum wage has failed to keep up with the cost of livingsince the late 1960s.
The Bottom Line
The Fair Labor Standards Act (FLSA) established the minimum wage which is $7.25 per hour as of January 2024. The government periodically assesses the federal minimum wage level but the rate has not increased since July 2009.Individual states, cities, and localities can pass minimum wage requirements that are different from the federal rate as long as their rate is higher than the federal minimum wage.
