What Is the US Minimum Wage? Pros, Cons and Facts

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

U.S. minimum wage worker
The cashier at the florist is only making minimum wage. Photo: Yin Yang/Getty Images

Definition: The U.S. minimum wage is the lowest hourly wage allowed in American companies. It's currently $7.25 per hour. Most states also have a minimum wage law. Employees receive whichever is higher, the federal or state minimum wage.

Minimum wage laws are designed to stop employers from exploiting desperate workers. It should not be confused with a minimum living wage. Although the minimum wage protects workers from exploitation, it hasn't kept pace with inflation.

In fact, 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 was trying to support a family by making minimum wage, they would qualify for federal poverty assistance.

How Many People Make Minimum Wage?

Perhaps surprisingly, not many people earn minimum wage, and they make up a smaller share of the workforce than they used to. Only 2.6 percent of working Americans earn minimum wage, down from 7.9 percent in 1979. According to the Bureau of Labor Statistics, 1.3 million hourly workers earned the minimum wage in 2014. Since certain jobs and workers are exempt from minimum wage laws, 1.7 million people earned less than minimum wage.

Those who earn the minimum wage, or less, tend to be young. More than half are between 16 to 24, while half of those are teenagers.

Most (77 percent) are white, and almost half are white women. That's because 64 percent are part-time workers. 

More than half work in the hotel and restaurant business. Retail employs 14 percent, while 8 percent work in education and health services. (Source: "Who Makes Minimum Wage?" Drew DeSilver, Pew Research Center, September 8, 2014.)

Why Can People Earn Below Minimum Wage?

Almost 1.8 million workers earn less than the minimum because they are exempt. Here are the exemption categories and wages:

  • Full-time students: 85 percent of minimum wage, in retail or service stores, agriculture or universities that obtain a certificate from the Department of Labor. Also, student hours are limited.
  • Vocational learners who are 16 or older: 75 percent of the minimum wage for vocational education employers. They must also get a certificate from the DOL.
  • Those under age 20 in their first 90 days of employment: $4.25/hour.
  • Workers with disabilities: Special minimum wage if the disability lowers the worker’s productivity. For more, see Fact Sheet 39.
  • Tipped employees: $2.13/hour if tips make up the equivalent of minimum wage. If not, then the employer must make up the difference.
  • Businesses that make less than $500,000 a year, 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 still receive minimum wage. Check the state minimum wage laws for these worker categories, although the federal law will take precedence if the amount is higher. (Source: "Q&A About the Minimum Wage," U.S.

Department of Labor.)

The Wage and Hour Division of the U.S. Department of Labor enforces the U.S. minimum wage law. For more details, see FLSA Reference Guide.

Minimum Wage by State

In 21 states, the minimum wage equals the federal level:

  • Two states have lower rates: Georgia and Wyoming.
  • Fourteen states set their rate to equal the federal wage.
  • Five states have no local law: Louisiana, Mississippi, Tennessee, Alabama and South Carolina.

The remaining 29 states and the District of Columbia set rates above the federal level. The District of Columbia has the highest minimum wage, $11.50 as of July 1, 2016. It will increase to $15 by July 1, 2020.

New York will raise the minimum wage in New York City to $15 per hour by the end of 2018.

California and Massachusetts both pay $10 an hour. California will increase the minimum wage to $15 an hour by Jan.

 1, 2022. That's for employers with 26 or more workers. Smaller companies have until Jan. 1, 2023. After that, the minimum will rise to keep up with inflation. (Source: "2016 Minimum Wage by State," National Conference of State Legislatures, July 19, 2016.)

Eleven states use a cost of living adjustment to account for inflation. That means they increase them minimum wage along with the Consumer Price Index. To find the specific laws for each state, see U.S. Department of Labor, Minimum Wage Laws by State. Track the increases in the minimum wage for each state since 1968 at State Minimum Wage History.

Advantages and Disadvantages

Arguments rage back and forth over whether the minimum wage is healthy for an economy or not. For the most part, those in favor of the minimum wage are affiliated with labor, while those opposed are with business.

Pros

Minimum wage laws intend to provide enough income to afford a living wage. That is the amount needed to provide enough food, clothing and shelter. The first pro is that allowing the most vulnerable, such as women and children, to pay for the cost of living improves worker morale.

Second, it increases productivity by making sure workers have enough to eat and aren't over-worked.

Third, a minimum wage spurs economic growth by giving workers more money to spend. This increases demand, boosting business growth.

Fourth, workers who have more time and money can then invest in their own education. This further increasing their productivity and improves the attractiveness of the country's labor pool. A more educated workforce increases innovation and the number of small businesses.

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

Cons

Businesses point out that the minimum wage raises their labor costs, which are already the largest budget item for most of them. By being forced to pay more per worker, they must hire fewer workers if they want to keep the total labor costs the same. This increases the unemployment rate. It especially hits low-wage workers the hardest, since they must now compete for fewer jobs.

Second, some smaller companies may not have the ability to hire fewer workers. They may be forced to declare bankruptcy instead. A 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.

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

Fourth, minimum wage laws may not even address their primary goal, which is to reduce poverty. By increasing unemployment, these laws increase the average poverty level. (Sources: David Newmark and William Wascher, Minimum Wages, MIT Press. “A ‘Very Credible’ New Study on Seattle’s $15 Minimum Wage Has Bad News For Liberals,” Washington Post, June 26, 2017.)

The Pros Outweigh the Cons Up to a Point

Some research shows that a minimum wage can actually increase the number of jobs in an economy. Businesses find other ways to offset higher labor costs, by increasing prices or reducing the number of hours worked. Worker morale, productivity and consumer spending all increase.

But the pros only outweigh the cons if the minimum wage isn’t too high. Wages cannot be so high that they reduce business flexibility to keep labor costs low during an economic downturn. In setting a minimum wage, the government has to find the sweet spot between protecting workers and giving businesses the flexibility they need to remain competitive. (Source: "Sense and Nonsense About Minimum Wages," The Economist, November 10, 2012.)

History

The U.S. minimum wage began in 1938 with the passage of the Fair Labor Standards ActPresident 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 $.25/hour, which is equivalent to $4.07/hour today.

The fierce competition during the Depression had forced companies to slash pay and extend hours just to stay in business. As a result, 25 percent of American children were working 60 hours a week or more, according to a Labor Department survey at the time. To address this, the FLSA also banned child labor and limited the work week to 44 hours. (Source: "FLSA 1938," U.S. Department of Labor.)

The minimum wage was raised by Congress three more times. By 1956, it reached $1/hour. But FLSA applied primarily to workers in interstate commerce. In 1961, the Act was amended to include workers in retail and service companies. It was also extended to local transportation, construction and gas station employees. Five years later, FLSA included state and local government employees. It also included more workers in service industries such as laundries, hotels and farms. (Source: "History of FLSA," U.S. Department of Labor.) 

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.
  • July 24, 2007 – $5.85 per hour.
  • July 24, 2008 – $6.55 per hour.
  • July 24, 2009 – $7.25 per hour. (Source: "What Is the Minimum Wage?" U.S. Department of Labor.)

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

But, Congress probably won't raise the U.S. minimum wage. One reason is that they're concerned it would force many small businesses to lay off workers to keep their overall labor costs in line. In fact, the Congressional Budget Office agrees. Raising the minimum wage would take 900,000 families out of poverty, but cost 500,000 workers their jobs by the end of 2016. (Source: "Minimum Wage Would Have Mixed Results," New York Times, February 18, 2014.)

It is unclear what stance President Trump will take on the minimum wage. As a candidate in the 2016 election, he expressed a wide variety of opinions on the matter. (Source: “A Guide to All of Donald Trump's Flip-Flops on the Minimum Wage,” Washington Post, August 3, 2016.)

How Does The United States Compare to Other Countries' Minimum Wages?

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.

U.S. minimum wage – $7.25 per hour. The wage can vary by state or by employee status, such as age.

UK minimum wage – £6.31/hour (US$10.78). Varies by age.

Ireland minimum wage – €8.65/hour (US$11.66). Varies by age.

European Union countries – 21 of the EU's 28 members have national minimum wages. The laws usually apply to all employees. The wages range from a low of €174/month in Bulgaria to a high of €1,921/month in Luxembourg (roughly US$235 to US$2,597). Six EU countries have a minimum wage higher than the United States. They are the Netherlands, Ireland, UK, France, Belgium and Luxembourg.

Thailand – 300 baht/day (US$9.88). Enacted January 1, 2013. Doubles the pay for some rural workers.

Australian minimum wage – AU$16.87/hour (US$15.84). Varies by age and job status.

Countries With No National Minimum Wage

Canada has no national minimum wage. Instead, each province and territory sets its own level. The national government is trying to get all of them to set a minimum of $12/hour (US$11.95).

Mexico also has no national minimum wage. A commission sets the minimum wage for the highest paid zone. That wage is 65 pesos a day, or $5.10. But this minimum is far below what any worker receives. It's used primarily as a base for negotiations. (Source: "Mexico Raises Minimum Wage," CBS MarketWatch, December 18, 2012.)

China also has no national minimum wage. That's because the cost of living is so varied across the country. Instead, each province sets its own level, with general guidance given by the national government. As a result, the minimum wage is at least 1,000 RMB/month (US$160). For details by province, see China Minimum Wage Update.

India also has no national minimum wage. But the Minimum Wage Act of 1948 said that states must negotiate with businesses to agree on a living wage. In 2012, the national government suggested that states adopt a minimum wage of 115 rupees/hour (US$2.13).