Minimum Wage

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 nonexempt workers may not be offered a job or agree to work.

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 2022 is $7.25 per hour.
  • States and local municipalities can set their own minimum wage rates, but they must be above the federal rate to take effect.

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 Italy, Sweden, Norway, and Singapore.

As of 2022, the federal minimum wage rate in the United States remains $7.25 per hour. This means that it is illegal for an American resident to be paid less than $7.25 per hour for their labor 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.

President Joe Biden has been campaigning to raise the federal minimum wage. These efforts, as of Feb. 3, 2022, have so far resulted in the minimum pay for government workers, except for U.S. Postal Service and Postal Regulatory Commission employees, being bumped up to $15 per hour.

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 $14.25 per hour (going up to $15 in 2023), while Montana has a minimum wage rate of $9.20.

As of 2022, minimum wage rates exceeded the federal rate in 30 of the 50 states. At $15.20 per hour, the District of Columbia has the highest minimum wage. The second highest is $15, paid to parts of New York and by employers with over 25 employees in California, and the third highest is $14,49, which is the minimum wage in Washington State.

As of Jan. 1, 2022, only five states have not adopted a state minimum wage: Alabama, Louisiana, Mississippi, South Carolina, and Tennessee.

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:

  • Georgia and Wyoming both have a minimum wage of just $5.15. However, employees covered under the FLSA are subject to the federal minimum wage of $7.25.
  • In Minnesota, small employers with annual sales of less than $500,000 pay a minimum wage of $8.42—rather than the regular state minimum of $10.33.
  • In Nevada, the minimum wage is $1 less than the specified minimum if health benefits are included. As of Jan. 1, 2022, that reduced amount is $8.75.
  • In Oklahoma, the minimum wage is $2 for employers with fewer than 10 full-time employees at any single location and employers with $100,000 or less in annual gross sales.

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.

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 $12, the city of Chicago, as of Jan. 1, 2022, has a minimum wage of $14–$15 depending on the size of the company.

Minimum Wage Exceptions

Several groups of individuals are exempt from being paid the minimum wage. Individuals who fall into these groups are usually paid below the minimum wage to incentivize companies to hire them.

Tipped workers

Low-wage laborers in the United States can be exempted from the minimum wage if a sizable portion of their income is derived from tips. A lower minimum wage of $2.13 per hour 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.

In a case where the employee’s total tips and hourly rate fall 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.

Under 20

Workers under 20 years of age may be paid $4.25 per hour by federal law until they pass a 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 the Minimum Wage in the United States

The first minimum wage law in the United States appeared more than a century ago. In 1912, Massachusetts set a minimum hourly rate for women and children under age 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 $4.94 today.

Federal minimum wage in the United States in the 2020s

As noted above, the federal minimum wage in the United States in 2022 is $7.25 and has not been raised since 2009. President Joe Biden’s American Rescue Plan, as initially presented to Congress, attempted to raise it to $15. This passed in the House of Representatives but was stripped out by the Senate parliamentarian, who ruled that the wage hike could not be passed under the process of budget reconciliation.

Nevertheless, President Biden was later successful in raising the minimum hourly wage of government employees to $15 and there is still hope that other categories of low-paid workers will eventually receive the same treatment. According to Senator Joe Manchin (D–West Virginia), there is sentiment in the Senate to raise the federal minimum wage. Time will tell whether or not he is right.

Special Considerations

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 the marginal revenue produced by the worker or if the employer incorrectly estimates the worker’s marginal productivity to be above $10 per hour.

Efficiency wages are a level of wages paid to workers above the minimum wage in order to retain a skilled and efficient workforce. Efficiency wage theory posits that an employer must pay its workers high enough so that workers are incentivized to be productive and that highly skilled workers do not quit. 

Advantages and Disadvantages of Minimum Wages

Minimum wage laws are designed to stamp out the 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.

Not everyone agrees with this sentiment, though, including, perhaps unsurprisingly, the people paying the wages. Critics point out that companies, not the government, should decide how much staff deserve to be paid.

Some also argue that a minimum wage does not always boost the spending power of a population and can instead lead to higher unemployment. There is a high elasticity of demand for low-wage labor. This means that a small change in the price for low-wage labor could have a large effect on its demand. As a result, too high a minimum wage could lead to increasing unemployment among low-wage workers.

In modern times, the proliferation of improved technology also increases the marginal rate of technical substitution for low-wage labor. When the cost of labor increases, companies find it increasingly profitable to switch to labor-replacing technology.

What Is the Minimum Wage in the U.S.?

The current federal minimum wage is $7.25 an hour. However, that rate might not always apply. Certain categories of workers may have to settle for less while many states, cities, and municipalities, as well as some companies, have their own minimum wages that are higher than the federal one.

Which State Has the Lowest Minimum Wage?

Georgia and Wyoming both have a minimum wage of just $5.15. However, employers in these states 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. Sadly, the federal minimum wage, which has failed to keep up with the cost of living since the late 1960s, does not meet this criteria. The reality is that people earning the minimum often struggle to pay bills, secure housing, and support a family.

Article Sources
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