What Is a Minimum Wage?
A minimum wage is the lowest wage per hour that a worker may be paid, as mandated by federal law. It is a legally mandated price floor on hourly wages, below which non-exempt workers may not be offered or accept a job.
- The minimum wage is a legally mandated price floor on hourly wages, below which non-exempt workers may not be offered or accept a job.
- As of 2020, the federal minimum wage rate in the United States is $7.25 per hour.
- Individual states, cities, and localities may pass different minimum wage requirements.
Understanding a Minimum Wage
Minimum wage laws were first introduced in Australia and New Zealand in an attempt to raise the income of unskilled workers. Nowadays, most modern developed economies, as well as many underdeveloped economies, enforce a national minimum wage. Exceptions include Sweden, Norway, and Singapore.
As of 2020, the federal minimum wage rate in the United States is $7.25 per hour. This means that it is illegal for an American worker to sell their labor for less than $7.25 per hour unless the worker falls into a category specifically exempted from the Fair Labor Standards Act (FLSA).
The government periodically assesses the federal minimum wage level for changes in inflation or cost of living. The federal minimum wage 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, rising to $5.85, $6.55, and then finally to $7.25.
Federal Minimum Wage vs. State Minimum Wages
Even though the United States enforces a federal minimum wage, individual states, cities, and localities may pass different minimum wage requirements, provided the stipulated hourly wage is not lower than the federal minimum wage. An employer who is subject to the federal and state minimum wage requirement must pay the higher of the two.
States will usually set a minimum wage that is reflective of the cost of living in the region. For example, the state of Massachusetts has a minimum wage of $12.75 per hour, while Montana has a minimum wage rate of $8.65.
As of 2020, minimum wage rates exceeded the federal rate in 29 of the 50 states, led by Washington at $13.50 per hour. California has a minimum wage of $13 per hour, although that rate is only applicable to employers of 26 or more staff.
The map below shows the minimum wage set at each state level. Some states have set their minimum wage higher than the federal minimum wage, others have matched the federal rate, and a select few don't have a minimum wage requirement. In the latter case, the federal minimum wage of $7.25 will apply.
Some states have special exceptions to their minimum wage rules.
- In Georgia and Wyoming, employees covered under FLSA are subject to the federal minimum wage of $7.25.
- In Minnesota, for employers with annual sales of less than $500,000, the minimum wage is $10.
- In Nevada, if health benefits are included, the minimum wage is $8.
- In Oklahoma, for employers with less than 10 full-time employees at any one location and employers with less than $100,000 in annual gross sales, the minimum wage is $2.00.
- Florida residents voted in November to increase the state's minimum wage incrementally (beginning at $10 per hour on Sept. 30, 2021) until it reaches $15 per hour in Sept. 2026.
State Minimum Wages vs. Municipal Minimum Wages
In some cases, cities and municipalities may set a higher minimum wage for their residents to account for more expensive living costs than in the rest of the state. For example, even though the state of Illinois set its minimum wage at $10, the city of Chicago has a minimum wage of $14.
Minimum Wage Exceptions
Several groups of individuals are exempt from being paid the minimum wage. Individuals that fall into these groups are usually paid below the minimum wage to incentivize companies to hire them.
Low-skilled laborers in the United States can be exempted from the minimum wage if a sizable portion of their income is derived from tips. If exempted, a lower minimum wage of $2.13 per hour applies 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 is equal to or greater than the federal minimum wage. In a case where the employee's total tips and hourly rate falls below the minimum wage, the employer is expected to compensate the employee for the shortfall.
A full-time student working for a university, retail store, or service establishment cannot be paid less than 85% of the minimum wage. Although students may work up to eight hours per day, they cannot work more than 20 hours per week when school is in session.
In addition, students in a technical or vocational program cannot be paid less than 75% of the minimum wage throughout their active enrollment in the program.
Workers below 20 years of age may be paid $4.25 per hour by federal law, until they pass the three-month probationary period, after which the employer must convert their pay structure to the federal minimum wage rate.
Physical or Mental Disabilities
Workers with physical or mental disabilities can be paid less than the federal minimum wage, according to the FLSA. Disabilities that can affect production capacity include blindness, cerebral palsy, alcohol and drug addiction, mental illness, and developmental disabilities.
History of Minimum Wage in the United States
The first minimum wage law in the United States appeared over one century ago. In 1912, Massachusetts set a minimum hourly rate for women and children under 18. Eventually, in 1938, the federal government established a minimum wage under the FLSA. The rate was set at $0.25, which, adjusting for inflation, is worth about $4.61 today.
Like all price floors, a minimum wage law only has a measurable effect when set above the market clearing price for a transaction. For example, a minimum wage of $10 per hour will not affect workers whose marginal productivity in a given line of work is greater than $10 per hour. The legal supply and demand rate remains unchanged for such labor.
For those with marginal productivity less than $10 per hour, however, a $10 per hour minimum wage creates an artificial shortage of profitable labor. An unskilled worker with marginal productivity of $8 per hour in California or Massachusetts can only offer to work at a loss to their potential employer. This means the employer can only hire the worker if they are willing to pay more in salary than marginal revenue produced by the worker or if the employer incorrectly estimates the worker's marginal productivity to be above $10 per hour.
Advantages and Disadvantages of Minimum Wages
Minimum wage laws are designed to stamp out exploitation of workforces and ensure that a country's working population does not fall below the poverty line. As the price of goods rises, so should the minimum wage.
However, critics point out that companies, not the government, should decide how much staff deserves to be paid. There is a high elasticity of demand for low-skilled labor. This means that a small change in the price for low-skilled labor could have a large effect on its demand. As a result, too high a minimum wage could lead to increasing unemployment among the low-skilled.
In modern times, the proliferation of improved technology also increases the marginal rate of technical substitution for low-skilled labor. When the cost of labor increases, companies find it increasingly profitable to switch to labor-replacing technology.