Federal Minimum Wage: History, Current Rate, and Economic Effects

The federal minimum wage was established by the Fair Labor Standards Act of 1938 at $0.25 per hour, covering approximately 20% of the workforce. Over the following decades, Congress periodically increased the rate and expanded coverage to additional sectors, including retail, agriculture, hospitality, and state and local government employees. The minimum wage reached its peak purchasing power in 1968 at $1.60 per hour (approximately $13.50 in 2024 dollars). Since then, infrequent adjustments have failed to keep pace with inflation or productivity growth.

The tipped minimum wage has remained at $2.13 per hour since 1991, with employers required to make up the difference if tips plus the tipped wage do not equal the regular minimum wage (the "tip credit"). Seven states have eliminated the tip credit entirely, requiring employers to pay the full minimum wage before tips. The subminimum wage for workers with disabilities under Section 14(c) of the FLSA allows employers holding special certificates to pay below the minimum wage, a provision that has generated increasing controversy.

The FLSA establishes the $7.25 per hour minimum wage for covered nonexempt employees. The Act applies to employees of enterprises with annual gross sales of at least $500,000 that are engaged in interstate commerce, as well as employees of hospitals, schools, and government agencies regardless of sales volume. Certain categories of workers are exempt from minimum wage requirements, including some agricultural workers, seasonal recreation establishment employees, and workers covered by the tipped minimum wage provision.

States that have enacted higher minimum wages effectively supersede the federal rate for workers within their borders, as the FLSA provides that the higher of the federal or state minimum wage applies. Several states have enacted automatic indexing provisions that adjust the minimum wage annually based on inflation measures, ensuring that purchasing power is maintained without requiring periodic legislative action. Local governments in approximately 50 jurisdictions have enacted minimum wages above their state levels.

The Raise the Wage Act and similar proposals would incrementally raise the federal minimum wage to $15 or $17 per hour over several years, eliminate the tipped minimum wage, eliminate the Section 14(c) subminimum wage for workers with disabilities, and index the minimum wage to median wage growth. The CBO has estimated that a $15 minimum wage would raise wages for an estimated 17 million workers while potentially reducing employment by 1.4 million workers and lifting 900,000 people out of poverty.

Alternative proposals include more modest increases (to $10 or $12 per hour), regional minimum wages that account for cost-of-living differences across areas, a lower training wage for new employees under a certain age for a limited period, and enhanced earned income tax credit expansions as an alternative to minimum wage increases. Some proposals combine minimum wage increases with small business tax relief to offset compliance costs. The appropriate level of the minimum wage ultimately involves a policy judgment about the relative weight given to increasing low-wage workers' income versus potential employment effects.

State and local minimum wage increases continue to outpace federal action, with ballot measures and legislative enactments raising minimum wages in numerous jurisdictions. The Department of Labor has issued rules updating the salary threshold for FLSA white-collar exemptions, which effectively determines the overtime eligibility of salaried workers. Research continues to emerge on the effects of recent state and local minimum wage increases, providing empirical evidence for ongoing policy debates. Congressional action on a federal minimum wage increase has been limited by partisan disagreements over the appropriate level, phase-in period, and treatment of tipped and youth workers.