Minimum Wage with Its Purpose, Pros, Cons, and History

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

U.S. minimum wage worker
••• Photo: Yin Yang/Getty Images

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 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. If it had, it would now be $10.41 an hour. If it had kept up with executive-level pay increases, it would be $23/hour. 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, enough to rent a studio in a rural area or college town. In some states and in all large cities, minimum wage workers often live with roommates.

History of the Minimum Wage

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 $0.25/hour, which is equivalent to $4.36/hour in 2018.

The fierce competition during the Depression forced companies to slash pay and extend hours just to stay in business. As a result, 25% 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 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. 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. Members are concerned it would force many small businesses to lay off workers to keep their overall labor costs in line.A 2019 Congressional Budget Office report agreed. Raising the minimum wage to $15 an hour by 2025 would take 1.3 million people out of poverty. It would also cost 1.3 million workers their jobs.

President Donald Trump first supported a $10 minimum wage, then opposed any minimum wage. Democrats, including 2020 presidential candidate Joe Biden, support raising the minimum to $15 an hour and tying it to inflation.

Arguments for the Minimum Wage

Most supporters of the minimum wage are worker advocates. They often list five advantages to the 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 reduces income inequality while providing an incentive to work. The incentive makes it better for society than welfare or a universal basic income. 

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 further increases their productivity. It improves the attractiveness of the country's labor pool. A more educated workforce 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 Minimum Wage

Most of those who oppose raising the minimum wage are businesses and conservatives. They list six disadvantages.

It's an Unfunded Mandate

The minimum wage is an unfunded mandate that falls on business shoulders. The 1996 minimum wage law increased costs by $4 million per state on average.

Increases Labor Costs

Minimum wage laws raise business labor costs. That's already the largest budget item for most businesses. 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. Some smaller companies may not be able to operate with fewer workers. They may be forced to declare bankruptcy instead.

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

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 although less experienced workers lost their jobs. This was according to a study of Seattle's minimum wage increase by the National Bureau of Economic Research. As a result, more people may be forced onto welfare.

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.

The Pros Outweigh the Cons (Up to a Point)

Some research shows that a minimum wage can 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. 

Fewer People Are Making the Minimum Wage

In 2014, the Pew Research Center found only 2.7% of working Americans earn minimum wage or less. That's down from 13.4% in 1979. According to the Bureau of Labor Statistics, 1.532 million hourly workers earned exactly the minimum wage. 

Those who earn the minimum wage or less are young. More than half are between 16 and 24, while half of those are teenagers. Most or 77% are white and almost half are white women. Sixty-four percent are part-time workers. 

More than half work in the hotel and restaurant business. Retail employs 14% of minimum wage workers. Eight percent work in education and health services.

Exempt Workers Make Less Than the Minimum Wage

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

  • Full-time students are 85% 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% 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 the 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.  The FLSA Reference Guide provides information on the minimum wage, overtime pay, and other standards affecting all types of workers. 

Minimum Wage by State

In 21 states, the minimum wage equals the federal level. Fourteen states set their rate to equal the federal wage. Louisiana, Mississippi, Tennessee, Alabama, and South Carolina have no local law. Georgia and Wyoming have lower rates.

The remaining 29 states and the District of Columbia set rates above the federal level. The District of Columbia has the highest minimum wage at $14 an hour. It will increase to $15 an hour by July 1, 2020.

Washington state, Massachusetts, and California are next. Their minimum wage is $12.00 an hour. Some cities in California have higher minimum wages. In Emeryville, California, the minimum wage is $15.69. In San Francisco, it is $15 per hour.

New York and Colorado pay $11.10 an hour, while Arizona and Maine pay $11.00 an hour.

Six states pay more than $10 an hour: Vermont at $10.78, Oregon at $111.25, and Rhode Island at $10.50. Hawaii, Maryland, and Connecticut pay $10.10 an hour.

Five states pay more than $9 an hour: Alaska at $9.89, Michigan at $9.45, Arkansas at $9.25, South Dakota at $9.10, and Nebraska at $9.00.

Four states pay more than $8.50 an hour: South Dakota at $8.85, New Jersey at $8.85, West Virginia and Delaware at $8.75, and Ohio and $8.55. Five states pay more than $8.00 an hour: Montana at $8.50, Florida at 8.46, Illinois and Nevada at $8.25, and Minnesota at $8.04.

Missouri pays $8.60 an hour, while New Mexico pays $7.50 an hour.

Eleven states use a cost of living adjustment to account for inflation. They increase the minimum wage along with the Consumer Price Index. The U.S. Department of Labor 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 States – $7.25 per hour. The wage can vary by state or by employee status, such as age.

United Kingdom – 8.72 pounds per hour or US$10.73. Varies by age.

Ireland – 10.10 euros an hour or US$10.97 Varies by age.

European Union countries – Twenty-one of the EU's 28 members have national minimum wages. The laws apply to all employees. The wages range from a low of 213.45 euros a month in Albania to a high of 2,141.99 euros a month in Luxembourg. These are roughly equivalent to a range of US$231 to US$2,324. Six EU countries have a minimum wage higher than the United States. They are the Netherlands, Ireland, France, Germany, Belgium, and Luxembourg.

Thailand – 310 baht/day or US$9.50/day in Bangkok and other large cities. The rest of the country is between 300 baht/day and 308 baht/day.

Australia – AU$19.49/hour equivalent to US$12.24/hour. Varies by age and job status.

U.S. Trade Partners With 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$11.55/hour or US$8.45/hour in Nova Scotia to C$15.20/hour or US$10.70/hour in British Columbia.

Mexico also has no national minimum wage. A commission sets the minimum wage for the highest-paid zone. That wage is 103 pesos a day or $5.10 per day. 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 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 wage is 2,420 RMB/month or US$382.67/month.

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. The minimum wage in Delhi for an unskilled worker is 569 rupees/day or US$7.39/day.

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