Minimum Wage

What you need to know

From the moment the minimum wage was established in 1938, Americans have debated the concept. Should there be a minimum wage – and why or why not? If we have one, what factors should determine its level?

What Is A Minimum Wage?

The minimum wage is the lowest hourly wage that an employer can legally pay an employee. It is set by federal or state law. Currently, the federal minimum wage is $7.25 per hour. The federal minimum wage is set by the Fair Labor Standards Act (FLSA). The FLSA applies to most employees, although there are exceptions such as tipped employees, people under age 14, and those working in certain agricultural or service industries, for whom the minimum wage is lower.

State laws can set higher minimum wages than the federal minimum. In fact, as shown below, 29 states and the District of Columbia have minimum wages that are higher than the federal minimum. Additionally, there are 18 states that require annual adjustments to minimum wage based on factors such as the inflation rate.

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How has the level and applicability of the minimum wage varied over time?

The federal minimum wage has been raised 22 times since it was first established in 1938. The most recent increase was in 2009, when the minimum wage was raised from $6.55 to $7.25 per hour. The dotted line in the chart below shows the trend in the nominal (actual amount) of the minimum wage over time, while the solid line reflects adjusted values that take into consideration inflation using 2022-era dollars. The adjusted values are typically a better measure of how much the minimum wage is worth in ‘current-time period dollars’ considering cost of living.

The plot of the wage’s adjusted values taking inflation into consideration shows that the purchasing power of the minimum wage has declined since the late 1960s. For example, in 1968, the nominal value of the minimum wage was less than $2.00 per hour, but the inflation adjusted value was over $11.00 per hour.

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What are the arguments for and against the minimum wage?

The central argument in favor of a minimum wage is that it puts more money in the paychecks of low-income workers. This argument is based on two primary claims: that no one’s wages should be below a certain standard for quality of life given the overall cost of living conditions and that without a minimum wage, employers will seek to drop wages as low as possible. The difficulty with these arguments is that people disagree about what level of pay is fair for workers and the actual effects of unemployment levels and hiring trends due to minimum wage mandates. Also complicating matters are topics like whether young workers should have the same minimum wage as someone who possesses greater skills or experience and may need to support others in their household.

One central argument against the minimum wage is that it may reduce overall employment – that if employers are forced to pay a higher minimum wage, they will hire fewer workers, either because they cannot afford a larger workforce or because some workers do not add enough value to justify paying a higher wage. Another concern voiced by some, including small businesses or those employers operating in low-margin industries, is that the cost of absorbing such minimum wage will be passed on to consumers in the form of higher prices for goods and services.

A related argument is that a minimum wage works against a free market where workers and employers are free to negotiate over wages and other compensation. By this logic, workers should be allowed to accept lower wages because they want to guarantee that a company hires them or because they are compensated in other ways, such as waitstaff who receive tips as part of their income. On the other hand, abolishing the minimum wage can give power to companies to lower wages, particularly during economic hard times when jobs are scarce.

What evidence is there about the impact of the minimum wage?

This is not an easy question to answer. The difficulty is that employment levels and wages move up or down for reasons other than the minimum wage, such as economic shocks. For example, unemployment rose after the last federal minimum wage increase in 2009 – but this change was due to the Great Recession, caused largely by speculation in housing markets that had nothing to do with a minimum wage. Unemployment levels have been very low in recent years, but this decline probably has more to do with increased retirements during the COVID pandemic than with a stable minimum wage. Unemployment has been stable even as large states like California, New York, and Illinois increased their minimum wages.

Looking across many studies of the effects of minimum wages, the central conclusion is that current minimum wage levels do not have any systematic impact on economic growth or unemployment; however, they can have a negative impact on certain businesses and the affordability of certain consumer goods and services. With this said, leveraging a minimum wage to support an increase in salaries of low-income, unskilled workers will continue to be debated, but it does help establish minimum quality of life standards based on current cost of living standards.

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Sources

What Is A Minimum Wage?

Allegretto, S., & Reich, M. (2018). Are local minimum wages absorbed by price increases? Estimates from internet-based restaurant menus. ILR Review, 71(1), 35-63. http://tinyurl.com/ykbwu7a7, accessed 12/14/23.
Card, D., & Krueger, A. B. (1995). Myth and measurement: The new economics of the minimum wage. Princeton University Press. https://www.jstor.org/stable/2487863, accessed 12/14/23.
Dube, A., Naidu, S., & Reich, M. (2007). The economic effects of a citywide minimum wage. ILR Review, 60(4), 522-543.https://www.jstor.org/stable/25249108, accessed 12/14/23.
United States Department of Labor. (2024). State Minimum Wage Laws. Wage and Hours Division. http://tinyurl.com/39n9awdt, accessed 2/6/24. (Chart Data).

How Has The Level and Applicability of The Minimum Wage Varied Over Time?

Allegretto, S., & Reich, M. (2018). Are local minimum wages absorbed by price increases? Estimates from internet-based restaurant menus. ILR Review, 71(1), 35-63. http://tinyurl.com/ykbwu7a7, accessed 12/14/23.
Card, D., & Krueger, A. B. (1995). Myth and measurement: The new economics of the minimum wage. Princeton University Press, accessed 12/14/23.
Cooper, D., Martinez, S., & Zipperer, B. (2022). The value of the federal minimum wage is at its lowest point in 66 years. Economic Policy Institute. https://tinyurl.com/bdd6dads, accessed 5/30/24. (Chart Data).
United States Department of Labor. (2023). 2023 – Minimum Wages for Tipped Employees. https://tinyurl.com/bdhwusav, accessed 5/29/24.
United States Department of Labor. (n.d) History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 – 2009. http://tinyurl.com/2zj48da2, accessed 12/14/23. (Chart Data).
Whitaker, E. A., Herian, M. N., Larimer, C. W., & Lang, M. (2012). The Determinants of Policy Introduction and Bill Adoption: Examining Minimum Wage Increases in the American States, 1997–2006. Policy Studies Journal, 40(4), 626-649. https://doi.org/10.1111/j.1541-0072.2012.00467.x, accessed 12/14/23.

What Are The Arguments For The Minimum Wage?

Allegretto, S., & Reich, M. (2018). Are local minimum wages absorbed by price increases? Estimates from internet-based restaurant menus. ILR Review, 71(1), 35-63. http://tinyurl.com/ykbwu7a7, accessed 12/14/23.
Card, D., & Krueger, A. B. (1995). Myth and measurement: The new economics of the minimum wage. Princeton University Press. https://www.jstor.org/stable/2487863, accessed 12/14/23.
Dube, A., Naidu, S., & Reich, M. (2007). The economic effects of a citywide minimum wage. ILR Review, 60(4), 522-543.https://www.jstor.org/stable/25249108, accessed 12/14/23.
Rose, S. (2020). State minimum wage laws as a response to federal inaction. State and Local Government Review, 52(4), 277-286.http://tinyurl.com/3hyy8yem, accessed 12/14/23.
Neumark, D., & Shirley, P. (2022). Myth or measurement: What does the new minimum wage research say about minimum wages and job loss in the United States? Industrial Relations (Berkeley), 61(4), 384–417. https://doi.org/10.1111/irel.12306, accessed 5/30/24.
Neumark, D., & Wascher, W. (2007). Minimum wages. MIT Press. http://tinyurl.com/2pe8mhf4, accessed 12/14/23.
Schmitt, J. (2019). Raising the minimum wage: The impact on low-wage workers, families, and businesses. Center for Economic and Policy Research. http://tinyurl.com/5dd7v8yd, accessed 12/14/23.

What Evidence Is There For Claims About The Impact of The Minimum Wage

Allegretto, S., & Reich, M. (2018). Are local minimum wages absorbed by price increases? Estimates from internet-based restaurant menus. ILR Review, 71(1), 35-63. http://tinyurl.com/ykbwu7a7, accessed 12/14/23.
Card, D., & Krueger, A. B. (1995). Myth and measurement: The new economics of the minimum wage. Princeton University Press. https://www.jstor.org/stable/2487863, accessed 12/14/23.
Dube, A., Naidu, S., & Reich, M. (2007). The economic effects of a citywide minimum wage. ILR Review, 60(4), 522-543.https://www.jstor.org/stable/25249108, accessed 12/14/23.

Contributors

Zul Norin (Intern) received her degree in Economics from Vanderbilt University in May 2024.
Mary Stafford (Intern) received her degree in Public Policy Analysis from Indiana University in May 2024 and is attending law school.
Dr. Laura Bucci is an Associate Professor of Political Science at Saint Joseph’s University. Her research focuses on how labor decline/resurgence influences political behavior, public policy, and state politics. She received her PhD from Indiana University.
Dr. William Bianco (Research Director) received his PhD in Political Science from the University of Rochester. He is Professor of Political Science and Director of the Indiana Political Analytics Workshop at Indiana University. His current research is on representation, political identities, and the politics of scientific research.
Dr. Nick Clark (Content Lead) is Professor of Political Science at Susquehanna University, where he is also Department Head in Political Science and Director of the Public Policy Program and the Innovation Center. He received his Ph.D. from Indiana University and researches political institutions, European politics, and the politics of economic policy.