Minimum wage in the United States

See also List of U.S. state minimum wages

History of the federal minimum wage in real and nominal dollars. Future increases under the Fair Minimum Wage Act of 2007 are shown in dark blue.

The federal minimum wage in the United States has been $5.85 per hour since 24 July 2007. Many states and municipalities have minimum wages higher than this (details here), but some U.S. territories (such as American Samoa) are exempt. Some types of labor are also exempt, and tipped labor must be paid a minimum of $2.13 per hour , as long as the hourly wage plus tipped income result in a minimum of $5.85 per hour.

The last increase on 24 July 2007 was the first of three steps of the Fair Minimum Wage Act of 2007. It was signed into law on 25 May 2007 as a rider to the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007. The act will raise the federal minimum wage twice more: to $6.55 per hour on 24 July 2008, and to $7.25 per hour on 24 July 2009. The bill also contains almost $5 billion in tax cuts for small businesses.

Earlier U.S. minimum wages laws

In 1912, Massachusetts organized a commission to recommend non-compulsory minimum wages for women and children. Within eight years, at least thirteen U.S. states and the District of Columbia would pass minimum wage laws. The Lochner era United States Supreme Court consistently invalidated compulsory minimum wage laws. Such laws, said the court, were unconstitutional for interfering with the ability of employers to freely negotiate appropriate wage contracts with employees.

The first attempt at establishing a national minimum wage came in 1933, when a $0.25/hour standard was set as part of the National Industrial Recovery Act. However, in the 1935 court case Schechter Poultry Corp. v. United States (295 U.S. 495), the United States Supreme Court declared the act unconstitutional, and the minimum wage was abolished.

The minimum wage was re-established in the United States in 1938 (pursuant to the Fair Labor Standards Act, which can be viewed here), once again at $0.25/hour ($3.22 in 2005 dollars). It had its highest purchasing value ever in 1968, when it was $1.60/hour ($9.12 in 2005 dollars). From 1 September 1996 through 23 July 2007 - a period of nearly ten years - the federal minimum wage remained constant at $5.15 per hour.

  States with minimum wage rates higher than the Federal minimum wage

  States with minimum wage rates equal to the Federal minimum wage

  States with no minimum wage law

  States with minimum wage rates lower than the Federal minimum wage

During his presidency, Bill Clinton gave states the power to set their minimum wages above the federal level. As of January 1, 2007, 29 states had done so. Community organizing efforts initiated by ACORN were responsible for the increases in some states such as Florida, Nevada, and Ohio. Some government entities, such as counties and cities, observe minimum wages that are higher than the state as a whole. One notable example of this is Santa Fe, New Mexico, whose $9.50-per-hour minimum wage is currently the highest in the nation, while New Mexico itself observes the federal minimum. Another device to increase wages, living wage ordinances, generally apply only to businesses that are under contract to the local government itself.

On 7 November 2006, voters in six states (Arizona, Colorado, Missouri, Montana, Nevada, and Ohio) approved statewide increases in the state minimum wage. The amounts of these increases ranged from $1 to $1.70 an hour and all increases are designed to annually index to inflation.

Many politicians in the United States advocate linking the minimum wage to the Consumer Price Index, thereby producing small annual increases rather than the larger hikes that tend to be adopted when legislation to do so is passed. So far, Ohio, Oregon, Missouri, Vermont and Washington have linked their minimum wages to the consumer price index. Beginning April 1, 2007, the minimum wage in Iowa will be $6.20 and will increase again $7.25 on January 1, 2008.

Minimum wage jobs rarely include health insurance coverage, although that is changing in some parts of the United States where the cost of living is high, such as California.

Kansas is the only state to have a minimum wage lower than the federal standard, at $2.65/hour. However, workers that qualify under the Fair Labor Standards Act are required to be paid the federal minimum wage. Most workers earning less than the federal minimum wage are minors and certain classes of farm workers.

Economists' analysis

A strong majority of American economists believes the minimum wage increases unemployment, though there is disagreement as to the magnitude. As a policy question in 2006, the minimum wage has to some extent split the economics profession with just under half believing it should be eliminated and a slightly smaller percentage believing it should be increased, leaving rather few in the middle.

Some idea of the empirical problems of this debate can be seen by looking at recent trends in the United States. The minimum wage fell about 29% in real terms between 1979 and 2003. For the median worker, real hourly earnings have increased since 1979, however for the lowest deciles, there have been significant falls in the real wage without much fall in the rate of unemployment. Some argue that a declining minimum wage might reduce youth unemployment (since these workers are likely to have fewer skills than older workers).

Comparison of the minimum wage to unemployment among teenagers in the U.S. In the data shown here, a higher minimum wage was correlated with higher unemployment among teenage workers relative to adult workers.

Over all, there is no consensus between economists about the effects of minimum wages on youth employment, although empirical evidence suggests that this group is most vulnerable to high minimum wages.

Views of Card and Krueger

The more common debate is on changes to minimum wages. This unified view was challenged by research done by David Card and Alan Krueger. In their 1997 book Myth and Measurement: The New Economics of the Minimum Wage (ISBN 0-691-04823-1), they argued the negative employment effects of minimum-wage laws to be minimal if not non-existent (at least for the United States). For example, they look at the 1992 increase in New Jersey's minimum wage, the 1988 rise in California's minimum wage, and the 1990-91 increases in the federal minimum wage. They assume that the demand for low-wage workers is inelastic.

Critics, however, argue that their research was flawed. For example, Card and Krueger gathered their data by telephoning employers in Pennsylvania and New Jersey, asking them whether they intended to increase, decrease, or make no change in their employment. Subsequent attempts to verify the claims requested payroll cards from employers to verify employment, and ostensibly found that the minimum wage increases were followed by decreases in employment. On the other hand, an assessment of data collected and analysed by David Neumark and William Wascher, economists who are usually critical of minimum-wage increases, did not initially contradict the Card/Krueger results, but in a later edited version they found that the same general sample set did increase unemployment. The 18.8% wage hike resulted in "[statistically] insignificant—although almost always negative" employment effects.

Another possible explanation for why the current minimum wage laws may not affect unemployment in the United States is that the minimum wage is set close to the equilibrium point for low and unskilled workers. Thus absent the minimum wage law unskilled workers would be paid approximately the same amount. However, an increase above this equilibrium point could likely bring about increased unemployment for the low and unskilled workers.

Agreement with Card and Krueger

Since the introduction of a national minimum wage in the UK in 1999, its effects on employment were subject to extensive research and observation by the Low Pay Commission. The Low Pay Commission found that, rather than make employees redundant, employers have reduced their rate of hiring, reduced staff hours, increased prices, and have found ways to cause current workers to be more productive (especially service companies). Neither trade unions nor employer organisations contest the minimum wage, although especially the latter had done so heavily until 1999.

Some leading economists accept the Card/Krueger results, while others, such as Greg Mankiw and Paul Krugman do not.

Disagreement with Card and Krueger

The Joint Economic Committee (having at the time a Republican majority) of the United States Congress has been critical of Card and Krueger's work. They note that it conflicts with other studies done on minimum wage laws within the United States over the past 50 years. According to the JEC, minimum wage laws have been shown to cause large amounts of unemployment, especially among low-income, unskilled, black, and teenaged populations, as well as cause a host of other mal-effects, such as higher turnover, less training, and fewer fringe benefits.

According to economists Donald Deere (Texas A&M), Kevin Murphy (University of Chicago), and Finis Weltch (Texas A&M), the Card and Krueger's conclusions are contradicted by "common sense and past research." They conclude that:

Each of the four studies examines a different piece of the minimum wage/employment relationship. Three of them consider a single state, and two of them look at only a handful of firms in one industry. From these isolated findings Card and Krueger paint a big picture wherein increased minimum wages do not decrease, and may increase, employment. Our view is that there is something wrong with this picture. Artificial increases in the price of unskilled laborers inevitably lead to their reduced employment; the conventional wisdom remains intact."

The importance of Card and Krueger's work does not necessarily lie in its empirical findings (which have been challenged by several studies more rigorous than Deere, Murphy and Weltch's) but in its emphasis on the importance in recognizing that theoretical economics is not incompatible with positive employment effects from the minimum wage.

Equivalence to a tax and subsidy

As argued by former Council of Economic Advisors Chairman Gregory Mankiw, a minimum wage is equivalent to:

1. A wage subsidy for unskilled workers, paid for by
2. A tax on employers who hire unskilled workers.

Part (1) of the policy provides some benefit to low wage workers while part (2) creates more unemployment among low wage workers. This is why the minimum wage is often criticized as a self-contradictory policy. Others argue the small decrease in employment is offset by the increased benefit to workers.

See also

• List of U.S. state minimum wages