Minimum Wage: Its Purpose, History, and $15 Wage Battle

The U.S. Minimum Wage Is $7.25/Hour: How Do You Compare?

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The minimum wage is the lowest legal wage companies can pay workers. The U.S. current national minimum wage is $7.25 per hour. Many states and cities have their own minimum wage. Employees receive whichever is higher, the federal or local minimum wage.

Purpose of the Minimum Wage

The purpose of minimum wage laws is to prevent employers from exploiting workers. The minimum wage should provide enough income to afford a living wage, the amount needed to provide enough food, clothing, and shelter.

Although the minimum wage is intended to protect workers from exploitation, it hasn't kept pace with inflation. Workers who earn a minimum wage today are paid around 27% less than their counterparts almost 50 years ago. If the minimum wage had been raised since 1968 at the same growth rate as average wages of typical U.S. workers, it would be $11.62 today. Instead, at 40 hours per week for 52 weeks, the minimum wage translates to $15,080 a year. That is more than the federal poverty level for a single person but is lower than the poverty level for a family of four. In other words, if someone were trying to support a family by making minimum wage, they would qualify for federal poverty assistance.

How much rent can Americans afford on the minimum wage? In most states, it could be enough to rent a studio in a rural area or college town. In some states and many large cities, minimum wage workers may often live with roommates.

History of the Minimum Wage

The Fair Labor Standards Act (FLSA) set the first U.S. minimum wage in 1938. President Franklin D. Roosevelt passed it as part of the New Deal to protect workers during the Great Depression. The Depression had caused wages for many to drop to pennies a day. Roosevelt set the minimum wage at $0.25/hour.

The fierce competition during the Depression forced companies to slash pay and extend hours just to stay in business. Another major issue was child labor. According to a U.S. Department of Labor (DOL) Children's Bureau survey from that time, 25% of the 449 American children who were surveyed were working 60 hours a week or more. Public interest grew around the issue, and in the leadup to establishing the minimum wage, President Roosevelt called a special session of Congress in 1937 to address matters. He said, “The exploitation of child labor and the undercutting of wages and the stretching of the hours of the poorest paid workers in periods of business recession has a serious effect on buying power."  As a result, the FLSA not only established the minimum wage, but banned oppressive child labor and limited the workweek to 44 hours.

The minimum wage was raised by the U.S. Congress three more times. By 1956, it reached $1/hour. But the FLSA applied primarily to workers in interstate commerce. In 1961, Congress amended the Act to include workers in retail and service companies as well as employees in local transportation, construction, and gas stations.. Five years later, FLSA included state and local government employees along with workers in service industries such as laundries, hotels, and farms. 

Racial Discrimination Issues

Critics and scholars have argued that minimum wage laws created issues of racial discrimination and inequality long before the first federal minimum wage was passed. In 1931, for instance, Congress passed the Davis-Bacon Act, which required contractors and subcontractors performing on federally funded or assisted contracts to pay their laborers and mechanics “prevailing wages.” However, those critical of the Act say it was passed with the specific intent to ​​favor White workers in White-only unions over non-unionized Black workers for scarce jobs during the Depression—and it has a continued effect today. 

The AFL-CIO, the U.S.’s largest federation of unions, argues that the Davis-Bacon Act is anything but “racist” and was intended “to fight back against the worst practices of the construction industry and ensure fair wages for those who build our nation.”

Recent Legislation and Action

The most recent amendment to the FLSA was the Fair Minimum Wage Act of 2007. It set these scheduled increases:

  • Before July 24, 2007 – $5.15 per hour.
  • From July 24, 2007 to July 23, 2008 – $5.85 per hour.
  • From July 24, 2008 to July 23, 2009 – $6.55 per hour.
  • On or After July 24, 2009 – $7.25 per hour.

In his 2014 State of the Union Address, then-President Obama called for an increase to $10.10. He signed an executive order that said all government contractors must comply with that minimum.

While democrats have long supported raising the minimum to $15 an hour, it’s faced hurdles in Congress. Members are concerned it would force many small businesses to lay off workers to keep their overall labor costs in line, a sentiment that reflects a 2019 Congressional Budget Office report. According to the report, raising the minimum wage to $15 an hour by 2025 would take 1.3 million people out of poverty. However, it would also cost 1.3 million workers their jobs.

While some states have implemented their own $15 minimum wage legislation, the federal minimum wage remains at $7.25. Current President Joe Biden made the $15 minimum wage a priority during election season, and continued to push for a federal mandate once he took office. Just after Biden took office, Democratic lawmakers introduced the Raise the Wage Act of 2021 to more than double the federal minimum wage to $15 by 2025.  A similar bill passed the House of Representatives in 2019 but stalled in the Republican-controlled Senate. While inaction on the minimum wage issue continues in Congress, in April 2021, President Biden issued an executive order to raise the minimum wage for contract workers to $15. 

Arguments for the $15 Minimum Wage

According to an April 2021 Pew Research study, the majority of U.S. adults (62%) favor raising the minimum wage to $15 an hour. In particular, 89% of Black adults and approximately three-quarters of Latinx and Asian-Americans are in favor of the hike. Here are five advantages of the $15 minimum wage.

Boosts Productivity

Workers who can cover the cost of living have better morale. They are more productive if they have a decent standard of living.

Reduces Income Inequality

A higher minimum wage can provide more incentive to work while reducing income inequality, the large disparity in how income is distributed between individuals, groups, populations, social classes, or countries due in part to structural racism or sexism. 

Testifying before the House of Representatives’ Committee on Education and Labor when the Raise the Wage act was first proposed in 2019, Ben Zipperer of the Economic Policy Institute argued that the current national minimum wage of $7.25 “hurts women as well as black and Hispanic workers the most.” He noted that the 56% of those who would benefit from a $15 minimum wage in 2024 are women, despite women making up only 48% of the total U.S. workforce. Zipperer added that  40% of all black workers would receive a wage increase along with 34%of Hispanic workers.

To show the potential value of even an incremental minimum wage increase, a 2019 study from the National Women’s Law Center reported that “for women working full time in states with a minimum wage of $10 per hour or more, the wage gap is 34[%] smaller."

Spurs Economic Growth

A minimum wage spurs economic growth because it gives workers more money to spend. This increases demand and business revenue.

Promotes Education and Self-Improvement

Workers who have more time and money can then invest in their education. This can further increases their productivity while improving the attractiveness of the country's labor pool. A more educated workforce can also increases innovation and the number of small businesses.

Improves Employee Retention

Finally, minimum wage laws benefit individual businesses. Workers are less likely to leave to find a higher-paying job. This reduces turnover and expensive retraining costs.

Arguments Against the $15 Minimum Wage

Among the groups that oppose the minimum wage increase to $15 are small business organizations like the National Federation of Independent Business (NFIB). According to an NFIB ballot from early 2021, 92% of small businesses say a $15 per hour minimum wage “would be harmful to Main Street and its job opportunities.” Here are some more specific arguments from the opposition. 

Reduction of Private Sector Employment

According to the NFIB Research Center, a $15 minimum wage proposed in the Raise the Wage Act would reduce private sector employment by over 1.6 million jobs and produce a cumulative U.S. loss of more than $2 trillion reduction in real economic output. 

Increase in Labor Costs

Minimum wage laws raise business labor costs, which can typically take up a large portion of the business’s budget. When the government makes it a law for them to pay more per worker, businesses tend to hire fewer workers to keep the total labor costs the same. This, in turn, increases the unemployment rate. It hits workers with income at or below the federal poverty threshold the hardest since they must now compete for fewer jobs. Some smaller companies also may not be able to operate with fewer workers and may be forced to declare bankruptcy instead.

Small Business and Industry Job Loss

Based on simulation results from the Business Size Insight Module (BSIM), a multi-region economic forecasting and policy analysis model, businesses with fewer than 100 employees are forecast to lose nearly 700,000 jobs, or about 43% of all private sector jobs lost. Meanwhile, according to the BSIM results, major industries including retail, administrative, and support services are forecast to experience large job losses, which offset increased wages for workers who are able keep or find jobs in these industries.

Penalizes Labor-Intensive Industries

The minimum wage penalizes companies that are labor-intensive. By default, this rewards those that are in capital-intensive industries. Over time, this can shift the very fabric of the country's economic base.

Increases Outsourcing

Minimum wage laws may increase job outsourcing. Companies move their facilities to countries where labor costs are lower.

Increases Unemployment and Poverty

Higher minimum wage laws may not reduce the country's poverty. It helps the workers who have jobs but increases unemployment. Research shows experienced workers received higher pay and increased job opportunities, while less experienced workers saw a loss in job opportunities. This was according to a study of Seattle's minimum wage increase by the National Bureau of Economic Research.

Increases the Cost of Living

Finally, minimum wages could raise the cost of living in some areas. A higher minimum wage allows workers to pay more for housing. As a result, landlords could raise rents, creating inflation.

Fewer People Are Making the Minimum Wage

According to the Bureau of Labor Statistics, the percentage of hourly paid workers earning the current federal minimum wage or less went down from 1.9% in 2019 to 1.5% in 2020. That's well below the 13.4% in 1979, when this data was first collected. In total, 1.1 million workers in 2020 earned wages at or below the current federal minimum wage of $7.25.

Those who earn the minimum wage or less are young. Although workers under age 25 represented just under 20% of hourly paid workers, they made up about 48% of those paid the federal minimum wage or less. Among workers who were paid hourly rates at or below the federal minimum wage, 2% were women and 1% were men.

Service occupations had the highest percentage of hourly paid workers earning at or below the federal minimum wage, at about 5%. The industry with the highest percentage of hourly workers earning at or below the federal minimum wage is leisure and hospitality at 8%.

Exempt Workers Make Less Than the Minimum Wage

Approximately 1.1 million workers earn less than the minimum wage because they fall under one of several exemptions. Here are some examples:

  • Employers who hire full-time students in retail or service stores, agriculture, or colleges and universities can obtain a certificate from the DOL allowing the student to be paid 85% of the minimum wage.
  • High school students who are 16 or older and are enrolled in vocational education classes may be paid 75% of the minimum wage if their employer obtains a certificate from the DOL.
  • According to 1996 FLSA amendments, those under age 20 may be paid no less than $4.25/hour by their employer in the first 90 calendar days after they are first employed.
  • Workers with disabilities can receive a special minimum wage if the disability lowers the worker’s productivity.
  • Tipped employees are paid $2.13/hour if that hourly pay and tips combined make up the equivalent of the federal minimum wage. If not, then the employer must make up the difference.
  • Businesses that make less than $500,000 a year can pay less than minimum wage unless they are involved in interstate commerce.

If anyone in these categories works for the government, a hospital, or a school, they are not exempt and must still receive minimum wage. Check the state minimum wage laws for these worker categories. The state minimum wage will take precedence over the federal minimum wage law if the amount is higher.

The Wage and Hour Division of the DOL enforces the U.S. minimum wage law. The FLSA Reference Guide provides information on the minimum wage, overtime pay, and other standards affecting all types of workers. 

State Minimum Wages

As of 2021, 29 states and D.C. have minimum wages above the federal minimum wage of $7.25 per hour. Meanwhile, five states—Alabama, Louisiana, Mississippi, South Carolina, and Tennessee—have not adopted a state minimum wage, while Georgia and Wyoming have a minimum wage below $7.25.  California has the highest minimum wage requirement at $14; Massachusetts, Connecticut, and Washington are the only other states with a limit of $13 or more per hour. Some cities like San Francisco, New York City, and the District of Columbia also impose city-level regulations mandating a $15/hr minimum wage or higher.

Seven states—Alaska, Florida, Minnesota, Montana, Ohio, South Dakota, and Vermont—automatically increased their wages based on the cost of living. The DOL lists the current minimum wage laws for each state. It also provides a history of the minimum wage for each state since 1968.

The Minimum Wage in Other Countries

Many countries have a national minimum wage. Most of them review and adjust it annually, depending on the cost of living. The U.S. minimum wage is lower than most other countries around the world, even though its cost of living is higher.

  • United Kingdom: Varies by age. For example, 8.91 pounds per hour for workers 23 and over or approximately US$12.
  • Ireland: 10.20 Euros an hour or approximately US$12. Varies by age.
  • European Union countries: Twenty-one of the EU's 27 members have national minimum wages. The laws apply to all employees. The wages range from a low of 332 Euros a month in Bulgaria to a high of 2,202 Euros a month in Luxembourg. These are roughly equivalent to a range of US$388 to US$2,573. Several EU countries have a minimum wage higher than the U.S. including the Netherlands, Ireland, France, Spain, Germany, Belgium, and Luxembourg.
  • Thailand: Minimum wage ranges from 313 to 336 Baht/day, depending on the province. This is US$9.99/day to US$10.72/day.
  • Australia: AUS$20.33/hour equivalent to roughly US$14.72/hour. Varies by age and job status.

U.S. Trade Partners With No National Minimum Wage

Canada: Instead, of a national minimum wage, each Canadian province and territory in sets its own level. They range from a low of C$11.75/hour or US$9.25/hour in New Brunswick to C$16.00/hour or US$12.16/hour in Nunavut.

While Canada has no national minimum wage, it does have its own history with provincial minimum pay and racial discrimination. For instance, in 1925, the province of British Columbia passed a minimum wage law with the expressed intent and effect of pricing Japanese immigrants out of jobs in the lumbering industry.

Mexico: A commission sets the minimum wage for the highest-paid zone, Zona Libre de la Frontera Norte (ZLFN). That wage is 185.56 pesos a day or $8.79 per day. For the rest of the country, the minimum wage is 123.22 pesos per day or $5.84 per day.

China: China has no national minimum wage because the cost of living varies so much across the country. Instead, each province sets its own level, with general guidance given by the national government. For example, Shanghai's minimum monthly wage is the country's highest at 2,590 RMB/month or US$400/month, while Beijing has the highest hourly wage at 25.3 RMB/US$3.90.

India: Instead of a national minimum wage, the minimum wage in cities like Delhi for a worker with less skills is 612 rupees/day or US$8.24/day.