What Is the Minimum Wage? Purpose, Pros, Cons, History

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

The minimum wage is the lowest legal wage companies can pay workers. 

Current Minimum Wage

The U.S. current national minimum wage is $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 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, $12.50 as of July 1, 2017. It will increase to $15 by July 1, 2020. The Massachusetts and Washington minimum wage is $11.00 an hour.

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

California pays $10.50 an hour for employers with 26 or more workers. They must increase the minimum wage to $15 an hour by Jan. 1, 2022. Smaller companies pay $10 an hour. They have until Jan. 1, 2023 to increase it. After that, the minimum will rise to keep up with inflation. 

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 The  U.S. Department of Labor lists the current minimum wage laws for each state.

It also provides a  jinhistory of the minimum wage  for each state since 1968.

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.

United States – $7.25 per hour. The wage can vary by state or by employee status, such as age.

United Kingdom – £7.50/hour (US$9.93) Varies by age.

Ireland – €9.25/hour (US$10.88). 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 €181.01/month in Albania to a high of €1,998.59/month in Luxembourg (roughly US$212.84 to US$2,350.04). Seven EU countries have a minimum wage higher than the United States. They are the Netherlands, Ireland, UK, France, Germany, Belgium and Luxembourg.

Thailand – 310 baht/day in Bangkok and other large cities. (US$9.28). Other towns are 308 baht/day and 305 baht/day. Rural areas still 300 baht per day. Supersedes the national uniform rate of 300 baht per day enacted January 1, 2013. That doubled the pay for some rural workers.

Australia – AU$18.29/hour (US$14.31). 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. They range from a low of C$10.85/hour (US$8.69) in Nova Scotia to C$15.00/hour (US$12.02) in Alberta. The national government is trying to get all of them to set a minimum of $12/hour (US$9.62).

Mexico also has no national minimum wage. A commission sets the minimum wage for the highest paid zone. That wage is 80.04 pesos a day, or $4.38. But this minimum is far below what any worker receives. It's used as a base for negotiations. 

China also has no national minimum wage. That's 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. As a result, the minimum wage is at least 1,160 RMB/month (US$174.63).

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$1.77). The minimum wage in Delhi is 513 rupees/day (US$7.88.)

Purpose

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

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.

History

The Fair Labor Standards Act 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 $.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. 

The minimum wage was raised by Congress three more times. By 1956, it reached $1/hour. But the FLSA applied primairly to workers in interstate commerce. In 1961, Congress amended the Act 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. 

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. 

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 it's 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. 

It is unclear what stance President Trump will take on the minimum wage. As a candidate in the 2016 election, Trump expressed a wide variety of opinions on the matter. 

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

The first advantage is that workers who can cover the cost of living have better morale.

Second, they are  more productive if they have enough to eat and aren't homeless.

Third, a minimum wage spurs economic growth. It by gives workers more money to spend. This increases demand and business revenue.

Fourth, workers who have more time and money can then invest in their own education. This further increasing their productivity. It 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 individual businesses. 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 laws raise their labor costs. That's already the largest budget item for most of them. When the government forces them to pay more per worker, they hire fewer workers to keep the total labor costs the same. This increases the unemployment rate. It 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.

Third, 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.

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

Fifth, ​minimum wage laws may not reduce the country's poverty. It helps the workers who have jobs, but increases unemployment. That means these laws increase the average poverty level

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. They raise prices or reduce 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 a company's ability to keep labor costs low during a recession. 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. 

How Many People Make Minimum Wage?

In 2016, the Pew Research Center found only 2.7 percent of working Americans earn minimum wage or less. That's down from 13.4 percent in 1979. According to the Bureau of Labor Statistics, 700,000 hourly workers earned exactly the minimum wage. It reported that 1.5 million people earned less than minimum wage. That's because certain jobs and workers are exempt from minimum wage laws,

Those who earn the minimum wage or less are 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 of minimum wage workers. Eight percent work in education and health services. 

Who Makes Less Than Minimum Wage?

Almost 1.5 million workers earn less than the minimum because they are exempt. Here are the exemption categories and wages:

  • Full-time students are 85 percent of minimum wage workers. They work in retail, service stores and agriculture. They also work in universities that obtain a certificate from the Department of Labor. Student hours are limited.
  • Vocational learners who are 16 or older make up 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 earn only $4.25/hour.
  • 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 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 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, although the federal law will take precedence if the amount is higher. 

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. (Source: "Q&A About the Minimum Wage," U.S. Department of Labor.)