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 workers can’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.
- Twenty-two states increased their minimum wage effective January 2024.
Delving into Minimum Wage
Minimum wage laws were first introduced in Australia and New Zealand to raise the income of unskilled 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 an exempted category under 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: $5.85, $6.55, and finally $7.25.
President Joe Biden campaigned on a promise to raise the federal minimum wage for government workers to $15 an hour. This was implemented on Jan. 30, 2022 following an Executive Order signed on April 27, 2021.
The Journey of the Minimum Wage
The first minimum wage laws emerged in the late 1800s when sweatshop labor was rampant in newly industrialized countries. Minimum wages were a key demand for the union movement, along with shorter hours and better working conditions.
New Zealand enacted the first national minimum wage in 1894, followed by the United Kingdom in 1909.
In the United States, minimum wage levels gathered support from labor organizers and consumer groups but faced significant resistance from business interests. Despite several states attempting to pass wage laws, a 1923 Supreme Court ruling deemed them unconstitutional. This changed with the New Deal when Congress finally enacted a federal minimum wage law in 1938, setting it at $0.25 per hour. Despite seeming low, this was significant for the time.
Federal Minimum Wage vs. State Minimum Wages
The United States enforces a federal minimum wage but states, cities, and localities can enact different rates provided the stipulated hourly wage meets or exceeds the federal minimum. Employers bound to both state and federal regulations must follow the higher rate.
States often set minimum wages that mirror the cost of living in their regions. For instance, the state of Massachusetts has a minimum wage of $15 as of Jan. 1, 2024, and Montana’s minimum wage has been set at $10.30 as of the same date. Minimum wage rates exceed the federal rate in 30 states and the District of Columbia as of January 2024.
A notable high-rate example is the District of Columbia with its $17 minimum wage, followed by Washington State at $16.28. New York and California are both set at $16. Conversely, Alabama, Louisiana, Mississippi, South Carolina, and Tennessee have not adopted a state minimum wage as of Jan. 1, 2024. Here the federal minimum wage of $7.25 applies by default.
Various states have special exceptions to their minimum wage rules:
- Georgia and Wyoming have a lower state minimum wage but employers covered under the FLSA adhere to the federal minimum.
- Small employers in Minnesota pay a lower wage if annual sales are below a certain threshold.
- Nevada’s minimum wage depends on whether health benefits are included, soon to equalize to a single rate of $12.
- Oklahoma allows lower wages for small-size employers or those with minimal annual gross sales.
- Florida’s scale-up approach aims for a $15 rate by 2026, currently at $12 as of Jan. 1, 2024.
- Nebraska’s minimum wage is climbing to $15 in 2026 from its $12 rate.
State vs. Municipal Minimum Wages
Cities and municipalities within states may enforce higher minimum wages to reflect regional costs of living. For instance, Chicago has maintained a minimum wage of $15 (or $15.80, depending on employer size) from July 2023 whereas the state’s rate is set at $14 from January 2024.
Minimum Wage Exceptions
Certain worker categories are exempt from minimum wage laws. Below are notable exceptions:
Tipped Workers
Low-wage laborers can be exempt if a significant portion of their income is derived from tips. A lower minimum wage of $2.13 per hour applies provided their tips meet or exceed the federal minimum wage. Employers must cover the shortfall if necessary.
Students
Full-time students working for certain employers must be paid at least 85% of the minimum wage and cannot work more than twenty hours per week when school is in session. Technical or vocational students must be paid a minimum of 75% of the wage.
Employees Under 20 Years Old
Workers aged below 20 may be paid $4.25 per hour during a three-month probation. Afterward, employers must match the federal minimum wage.
Workers With Physical or Mental Disabilities
Under certain conditions, employers can pay less than the federal minimum wage to workers with these disabilities.
The $15 Minimum Wage Debate
Minimum wage laws are aimed at preventing workforce exploitation and ensuring no worker falls below the poverty line. The FLSA governs these regulations spanning full-time and part-time workers across the private sector and government.
Proponents of the $15 Minimum Wage
Proponents assert that increasing the wage aligns it closer with a living wage, tackling income inequality, spurring economic growth, and enhancing employee retention.
Examples of $15 Per Hour
Several companies have voluntarily raised their rates to $15/hr independently, like Bank of America, Amazon, and Starbucks.
Opposition Against a $15 Minimum Wage
However, critics suggest that such wages should be market-driven rather than government-mandated, and fear possible repercussions like unemployment, business offshoring, and higher consumer prices.
Minimum Wage vs. Living Wage
The living wage represents an income necessary to meet basic needs, typically higher than the legally set minimum wage. While the minimum wage was closer to a living wage in the past, factors such as inflation have widened the gap since the peak buying efficiency seen in 1968.
What Are Efficiency Wages?
Efficiency wages are voluntary wages set above the minimum wage meant to retain skilled and effective workers. This theory suggests that sufficiently high pay incentivizes employees to be productive and reduces turnover.
The States with the Lowest Minimum Wage
Georgia and Wyoming both maintain a state minimum wage of $5.15; however, they abide by the federally mandated $7.25 where applicable.
Is the Minimum Wage a Living Wage?
Although minimal, a living wage should adequately cover basic living costs, differing from the federally maintained minimum wage. In 2023, the poverty level for a family of four was equivalent to an hourly rate of $14.42, suggesting that the federal minimum hasn’t kept pace with living costs since the late 1960s.
Conclusion
The Fair Labor Standards Act (FLSA) established a minimum wage which as of January 2024, stands at $7.25 per hour. Despite periodic assessments, the rate hasn’t risen since July 2009. States and localities may implement higher rates, balancing out disparities in living costs.
Related Terms: living wage, Fair Labor Standards Act, efficiency wages, unemployment.
References
- Economic Policy Institute. “Twenty-Two States Will Increase Their Minimum Wages on January 1, Raising Pay for Nearly 10 Million Workers”.
- Library of Congress. “From the Serial Set: The History of the Minimum Wage”.
- U.S. Department of Labor. “History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938-2009”.
- U.S. Bureau of Labor Statistics. “CPI Inflation Calculator”.
- U.S. Department of Labor. “Minimum Wage”.
- U.S. Department of Labor. “Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA)”.
- U.S. Department of Labor. “History of Changes to the Minimum Wage Law”.
- U.S. Department of Labor. “Final Rule: Increasing the Minimum Wage for Federal Contractors (Executive Order 14026)”.
- International Labour Organization. “Chapter 1 - What Is a Minimum Wage: 1.3. A Short History”.
- U.S. Department of Labor. “Fair Labor Standards Act of 1938: Maximum Struggle for a Minimum Wage”.
- National Conference of State Legislatures. “State Minimum Wages”.
- U.S. Department of State. “Increase to State of Florida’s Minimum Wage”.
- New York Times. “Nebraska Initiative 433 Election Results: Increase Minimum Wage”.
- U.S. Department of Labor. “State Minimum Wage Laws”.
- City of Chicago. “Minimum Wage”.
- U.S. Department of Labor. “Minimum Wages for Tipped Employees”.
- U.S. Department of Labor. “Full-Time Student Program”.
- U.S. Department of Labor. “Student-Learner Program”.
- U.S. Department of Labor. “Youth Minimum Wage Program”.
- U.S. Department of Labor. “Fact Sheet #39: The Employment of Workers With Disabilities at Subminimum Wages”.
- U.S. Department of Labor. “Wages and the Fair Labor Standards Act”.
- Economic Policy Institute. “Why the U.S. Needs a $15 Minimum Wage”.
- Dube, Arindrajit, Lester, William T., and Reich, Michael. “Do Frictions Matter in the Labor Market? Accessions, Separations, and Minimum Wage Effects: Abstract”. UC Berkeley: Institute for Research on Labor and Employment, 2011.
- Society for Human Resource Management. “Big Companies Are Raising Wages for Lowest-Paid Workers”.
- Congressional Budget Office. “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage”, Pages 4, 12-13.
- Seattle Times. "$7.25 an Hour: The Federal Minimum Wage Peaked in Purchasing Power in 1968".
- U.S. Department of Health and Human Services. “HHS Poverty Guidelines for 2023”.
