Minimum Wage: Federal vs. State, Exceptions, and FAQs

What Is 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.

Understanding Minimum Wage

Minimum-wage laws were first introduced in Australia and New Zealand in an attempt to raise the income of unskilled workers. Most modern developed economies, as well as many developing economies, enforce a national minimum wage. Exceptions include Italy, Sweden, Norway, and Singapore.

The first minimum-wage law in the United States appeared in 1912 when Massachusetts set a minimum hourly rate for women and children under age 18.

In 1938, the federal government established a minimum wage of $0.25 under the Fair Labor Standards Act (FLSA). Adjusting for inflation, that wage is worth $5.31 as of May 2023.

As of 2022, the federal minimum wage rate in the United States is $7.25 per hour, unless the worker falls into a category specifically exempted from FLSA.

The government periodically assesses the federal minimum wage level with changes in inflation or 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, rising to $5.85, $6.55, and then finally to $7.25.

History of the Minimum Wage

The first minimum wage laws date to 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.

In the United States, minimum wages were advocated both by labor organizers and consumer groups, 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, passed in 1938, set the minimum wage at $0.25 per hour. Although it may seem low by today's standards, that wage provided a reasonably comfortable living for Depression-era families.

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 as long as 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 the cost of living in the region. For example, the state of Massachusetts has a minimum wage of $15 in 2023, while Montana has a minimum wage rate of $9.95.

As of 2023, minimum-wage rates exceeded the federal rate in 30 of the 50 states. At $16.50 per hour, the District of Columbia has the highest minimum wage. The second highest is $15.74, paid in Washington State; the third highest is $15.50, the minimum wage in California.

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 currently $1 less than the specified minimum if health benefits are included. As of Jul. 1, 2024, a $12 minimum wage for all employees will replace the current two-tier system, provided a measure on the Nov. 8, 2022, ballot passes. The measure is currently passing with 83% of the votes in.
• 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.
  

State Minimum Wages vs. Municipal Minimum Wages

In some cases, cities and municipalities within a state may set a higher minimum wage for residents who live within areas with higher costs of living. Within the state of Illinois, where the minimum wage is $13, the city of Chicago has a minimum wage of $14–$15 for certain industries enacted in January 2022.

Minimum-Wage Exceptions

Certain categories of workers have often been 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 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. 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.

Students

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. Students in a technical or vocational program cannot be paid less than 75% of the minimum wage throughout their active enrollment in the program.

Employees Under 20 Years Old

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 that, the employer must convert their pay structure to the federal minimum-wage rate.

Workers With 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.

The $15 Minimum Wage

Minimum-wage laws were designed to end the exploitation of workforces and ensure that a country's working population does not fall below the poverty line. The Fair Labor Standards Act (FLSA) established the minimum wage affecting full-time and part-time workers in the private sector and federal, state, and local governments.

In 2022, debate surrounds the establishment of a $15 minimum wage. President Joe Biden’s American Rescue Plan attempted to raise it. However, the Biden administration 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 satisfactory standard of living.

They also claim a boost increases worker productivity, reduces income inequality, spurs economic growth, and improves employee retention.

Arguments Against a $15 Minimum Wage

Critics argue that companies, not the government, should decide how much employees should be paid and that a minimum wage does not 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 to increasing unemployment among low-wage workers. 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, critics note.

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. While the minimum wage is established by law, a living wage is calculated based on factors such as average rents, cost of living, transportation, and childcare costs.

In fact, 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. After that, inflation and price increases caused the real earnings of a minimum wage worker to fall, while productivity increased.

The Bottom Line

The Fair Labor Standards Act (FLSA) is the federal law that established the minimum wage, which is $7.25 per hour in 2022. The government periodically assesses the federal minimum wage level. However, the rate has not increased since July 2009. Individual states, cities, and localities may pass different minimum wage requirements as long as the rate is higher than the federal minimum wage rate.