Minimum Wage

A minimum wage is the lowest wage per hour that a worker may be paid, as mandated by federal law. The minimum wage is a legally mandated price floor on hourly wages, below which non-exempt workers may not be offered or accept a job.

As of 2017, the federal minimum wage rate in the United States is $7.25 per hour. This means that it is illegal for an American worker to sell their labor for less than $7.25 per hour unless the worker falls into a category specifically exempted from the Fair Labor Standards Act (FLSA).

Minimum wage laws were first used in Australia and New Zealand in an attempt to raise the income of unskilled workers. Most modern developed economies and many underdeveloped economies enforce a national minimum wage. Examples of countries with no established minimum wage include Sweden, Denmark, Iceland, Norway, Switzerland and Singapore.

Even though the United States enforces a federal minimum wage, individual states, cities, and localities may also pass different minimum wage requirements as long as the stipulated hourly wage is not lower than the federal minimum wage. An employer who is subject to the federal and state minimum wage requirement must pay the higher of the two. States will usually set a minimum wage that is reflective of the cost of living in the region. For example, the state of Massachusetts has a minimum wage of $11 per hour, compared to Arkansas which has a minimum wage rate of $8.50. As of 2017, minimum wage rates exceeded the federal rate in 29 of the 50 states, led by Massachusetts and Washington at $11 per hour. Some states like Alabama, New Hampshire, and South Carolina have no state minimum wage.

Cities and municipalities may also set a minimum wage for their residents which must be higher than the federal minimum wage. For example, even though the state of Illinois set its minimum wage at $8.25, the city of Chicago has a minimum wage of $11.00.

The government periodically assesses the federal minimum wage level for changes in inflation or cost of living. The table shows the minimum wage set at each state level. Some states have set their minimum wage higher than the federal minimum wage, others have set the same minimum wage as the federal rate, and a select few don't have a minimum wage requirement. In the latter case, the federal minimum wage of $7.25 will apply.

Like all price floors, a minimum wage law only has a measurable effect when set above the market clearing price for a transaction. For example, a minimum wage of $10 per hour will have no effect for workers whose marginal productivity in a given line of work is greater than $10 per hour. The legal supply and demand remains unchanged for such labor.

For those with a marginal productivity less than $10 per hour, however, a $10 per hour minimum wage creates an artificial shortage of profitable labor. An unskilled worker with a marginal productivity of $8 per hour in California or Massachusetts can only offer to work at a loss to his or her potential employer — that is, the employer can only hire the worker if they are willing to pay more in salary than marginal revenue produced by the worker, or unless the employer incorrectly estimates the worker’s marginal productivity to be above $10 per hour.

Several groups of individuals are exempt from being paid the minimum wage. Individuals that fall into these groups are usually paid below the minimum wage in order to incentivize companies to hire them.

Low-skilled laborers in the United States can be exempted from the minimum wage if a sizable portion of their income is derived from tips. If exempted, a lower minimum wage of $2.13 per hour applies to tipped employees who regularly receive more than $30 in tips per month, or if the total tips retained in addition to the hourly wage rate is equal to or greater than the federal minimum wage. In a case where the employee’s total tips and hourly rate falls below the minimum wage, the employer is expected to compensate the employee for the shortfall.

A full-time student working for a university, retail store, or service establishment can be paid not less than 85% of the minimum wage. Although students may work up to 8 hours per day, they cannot work more than 20 hours per week when school is in session. In addition, students in a technical or vocational program can be paid not less than 75% of the minimum wage throughout their active enrollment in the program.

Workers below 20 years of age may be paid $4.25 per hour by federal law, until they pass the three-month probationary period, after which the employer must convert their pay structure to the federal minimum wage rate.

Finally, workers with physical or mental disabilities can be paid less than the federal minimum wage according to the Fair Labor Standards Act (FLSA). Disabilities which can affect production capacity include blindness, cerebral palsy, alcohol and drug addiction, mental illness, and developmental disabilities.

There is a high elasticity of demand for low-skilled labor. This means that a small change in the price for low-skilled labor tends to have a large effect on its demand. For these reasons, too high a minimum wage can lead to increasing unemployment among the low-skilled.

In modern times, the proliferation of improved technology also increases the marginal rate of technical substitution for low-skilled labor. When the cost of labor increases, companies find it increasingly profitable to switch to labor-replacing technology, such as the decision made by Wendy’s Co. in 2016 to introduce self-serve kiosks in response to higher minimum wage laws.