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

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 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. 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, 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.

The fierce competition during the Depression forced companies to slash pay and extend hours just to stay in business. According to a Labor Department's Children's Bureau survey from that time, 25% of the 449 American children who were surveyed were working 60 hours a week or more. 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.
  • 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.

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 has both opposed and supported raising the minimum wage. Democrats support raising the minimum to $15 an hour.

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 1996 minimum wage law is an unfunded mandate that falls on business shoulders. The Congressional Budget Office estimated that over five years, that mandate would cost state, local, and tribal governments a total of more than $1 billion.

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 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.

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

According to the Bureau of Labor Statistics, the percentage of hourly paid workers earning the current federal minimum wage or less went down from 2.1% in 2018 to 1.9% in 2019. That's down from 13.4% in 1979. In total, 1.6 million workers 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 only about 20% of hourly paid workers, they made up about 40% of those paid the federal minimum wage or less. Among workers who were paid hourly rates at or below the federal minimum wage, 3% 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 6%. The industry with the highest percentage of hourly workers earning at or below the federal minimum wage is leisure and hospitality at 10%.

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:

  • Employers who hire full-time students in retail or service stores, agriculture, or colleges and universities can obtain a certificate from the Department of Labor (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.
  • 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 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

14 states set their minimum wage rate to equal the federal minimum wage. Louisiana, Mississippi, Tennessee, Alabama, and South Carolina have no state-level law. On the more extreme ends of the spectrum, Washington has the highest minimum wage requirement at $13.69; Massachusetts and California are the only other states with a limit of $13 or more per hour. Conversely, at $5.15 per hour, Georgia and Wyoming are the only states to have a minimum wage below the federal mark of $7.25. 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.

State Minimum Wages

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$11.42. Varies by age.
  • Ireland: 10.12 euros an hour or about 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 209 euros a month in Albania to a high of 2,142 euros a month in Luxembourg. These are roughly equivalent to a range of US$247 to US$2,534. Six EU countries have a minimum wage higher than the United States. They are the Netherlands, Ireland, France, 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: AU$19.49/hour equivalent to roughly US$14.90/hour. Varies by age and job status.

U.S. Trade Partners 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$11.32/hour or US$8.60/hour in Saskatchewan to C$16.00/hour or US$12.16/hour in Nunavut.

Mexico also has no national minimum wage. 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 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 2,480 RMB/month or US$372.06/month.

India also has no national minimum wage. The minimum wage in Delhi for an unskilled worker is 569 rupees/day or US$7.72/day.