The minimum wage is the lowest hourly rate that an employer can pay an employee according to law. Many states have minimum wages in place. But the federal minimum wage hasn't increased since 2009, despite many attempts to do so. The discussion around increasing the minimum wage brings both pros and cons.
As of January 2024, Washington had the highest state minimum wage rate at $16.28 per hour. Washington, D.C. has the highest rate overall at $17.00 an hour.
There's also a federal minimum wage at $7.25 an hour. Employers must pay minimum wage employees whichever rate is higher, so if the federal rate is higher than the state rate, an employee gets the federal minimum wage. The same is true if the state rate is higher.
Minimum wage laws have been in effect in the United States since 1938 when the first federal rate was set at $0.25 per hour.Amendments were made to the Fair Labor Standards Act (FLSA) since then, increasing the base rate of pay for many hourly workers according to inflation.
Key Takeaways
- Despite efforts to raise the minimum wage, no bill has successfully passed both chambers of Congress.
- Proponents of raising minimum wages argue that changes are needed to help incomes keep pace with increasing costs of living, and a higher minimum wage will lift millions out of poverty.
- Opponents of raising the minimum wage believe that higher wages could lead to inflation, make companies less competitive, and result in job losses.
Understanding the Minimum Wage
As noted above, the term minimum wage refers to the legally established lowest amount that employers are required to pay their employees for their work. It serves as a baseline wage that is intended to ensure that workers receive fair compensation for their labor, covering basic living expenses and preventing the exploitation of low-wage workers.
The primary purpose of minimum wage is to provide workers with a level of income that allows them to meet their essential needs. It acts as a safeguard against extremely low wages and helps reduce poverty and income inequality within a society. By setting a minimum wage, governments aim to promote decent working conditions and provide a degree of economic security for workers.
National and sub-national government entities analyze several factors when considering whether to raise or maintain the current level of minimum wage. As the general increase in prices over time, inflation can erode purchasing power. Economic conditions such as the state of the economy may call for adjusted labor market dynamics. Social equity considerations may call for more livable wages. Regardless of the consideration, there are various reasons to support and detract from raising the minimum wage.
On Oct. 24, 1938, the first minimum hourly wage was put into effect. The wage rate was $0.25 per hour.
Pros of Raising the Minimum Wage
The primary argument advanced in favor of raising the minimum wage is that higher earnings would improve the overall standard of living for minimum wage workers by providing them with a more appropriate income level to handle the cost of living increases.
A 2022 study by the Congressional Budget Office analyzed the macroeconomic impact of the standard minimum wage reaching $15 per hour in 2027. The data reported that 10.9 million workers would be directly affected, while an additional 9.2 million workers would potentially be affected. The total directly or potentially affected workers by 2032 would surpass 23 million.
While some proponents of raising the minimum wage estimate that a much larger number of individuals and families will move out of poverty if they earn more money, a related potential benefit is a projected reduction in the need for federal and state government expenditures on financial aid for poor and low-income individuals.
Meanwhile, an intangible benefit that could translate into tangible benefits for both companies and employees is improved employee morale resulting from higher wages. Business owners frequently note the challenge of providing sufficient encouragement to spur workers to put maximum effort into their job duties, and that this is particularly problematic with low-wage workers who feel that their job efforts aren't keeping them out of poverty.
Increasing employee morale could easily translate into more tangible benefits, such as increased employee retention and reduced hiring and training costs. Employees who are more inclined to stay with a company longer could benefit from greater advancement and an overall reduction in job-related relocation expenses.
A boost to economic growth is another potential advantage of increasing the minimum wage, as consumer spending typically increases along with wages. A higher minimum wage would put more discretionary dollars in the pockets of millions of workers; money that would then flow to retailers and other businesses.
Lawmakers have tried to raise the federal minimum wage on many occasions. The U.S. House of Representatives passed an amended version of the Raise the Wage Act of 2019 in July of that year to gradually increase the federal minimum wage to $15 an hour by 2025. But the bill died in the Senate. President Joe Biden tried to increase the rate for federal contract workers to $15 per hour, but that motion was blocked by a U.S. district judge in September 2023.
Cons of Raising Minimum Wage
Among the disadvantages of increasing the minimum wage is the probable consequence of businesses increasing prices, thus fueling inflation.
Opponents argue that raising the minimum wage would likely result in wages and salaries increasing across the board, thereby substantially increasing operating expenses for companies that would then increase the prices of products and services to cover their increased labor costs.
Increased prices mean a general increase in the cost of living that could essentially negate any advantage gained by workers having more dollars in their pockets.
Though the current federal minimum wage in the U.S. is $7.25 per hour, 30 states and D.C. have approved higher minimum wages.
Another projected problem resulting from an increased minimum wage is that of potential job losses. Many economists and business executives who point out that labor is a major cost of doing business argue that businesses will be forced to cut jobs to maintain profitability.
The same 2022 study mentioned above by the Congressional Budget Office also analyzed how higher wages may result in the elimination of roles. By 2027, the CBO estimated that up to 1.6 million jobs would be lost. By 2032, this would increase to 1.9 million lost jobs.
One potentially negative impact that is less readily apparent is the possibility that a higher minimum wage would result in increased labor market competition for minimum wage jobs.
The net outcome of an increased minimum wage might be a large number of overqualified workers taking minimum wage positions that would ordinarily go to young or otherwise inexperienced workers. This could impede younger, less experienced entrants to the job market from obtaining work and gaining experience to move their careers forward.
How Does Minimum Wage Affect the Economy?
The impact of minimum wage on the economy is a complex issue. Supporters argue that increasing minimum wage can stimulate consumer spending and boost the overall economy by putting more money in the hands of low-wage workers. Critics, on the other hand, warn that higher labor costs might lead to job cuts, automation, and increased prices for goods and services.
Is Minimum Wage the Same for All Workers?
No, minimum wage laws often take into account different categories of workers. For example, there might be different minimum wage rates for adult workers, minors, or workers in specific industries. Tipped employees, like servers in restaurants, may also have a lower minimum wage due to the expectation of receiving tips.
Does Inflation Impact Minimum Wage?
Yes, inflation can erode the purchasing power of minimum wage over time. To address this, some governments index minimum wage to inflation rates. This means that the minimum wage is adjusted periodically to ensure that its real value remains relatively constant.
How Does Minimum Wage Affect Small Businesses?
The impact of minimum wage increases on small businesses can vary. Some small businesses might struggle to absorb the additional labor costs, potentially leading to layoffs or reduced hours. Others might adapt by increasing prices or finding operational efficiencies to mitigate the impact.
Do All Countries Have Minimum Wage Laws?
While minimum wage laws are prevalent in many countries, not all nations have implemented such legislation. The presence and level of minimum wage often depend on a country's economic structure, labor policies, and social priorities.
The Bottom Line
Raising the federal minimum wage to $15 an hour is a policy goal for many lawmakers. Increasing the minimum wage is expected to lift individuals out of poverty and improve work ethic, however, it also comes with many possible negative implications, such as inflation and a loss of jobs.
