What is a Minimum Wage? - Definition & History

Lesson Transcript
Instructor: Paul Mckinney

Paul has been in higher education for 17 years. He has a master's degree and is earning his PhD in Community College Leadership.

Minimum wage is the lowest amount an employer can pay its employees for work performed. In the United States, the minimum wage was first enacted by Congress in 1938. Learn more about it in this lesson. Updated: 04/28/2021

Minimum Wage and Its History

Minimum wage is the minimum amount of compensation an employee must receive for performing labor. It is illegal to pay an employee less than the minimum wage.

In 1912, Massachusetts, an industrial state, was the first state to enact minimum wage legislation. By 1920, 13 states, Puerto Rico, and the District of Columbia had enacted minimum wage programs. The Great Depression moved even more states to enact protective minimum wage legislation, and by 1938, the federal government enacted the Fair Labor Standards Act. The act allowed Congress to set the federal minimum wage.

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  • 0:00 Minimum Wage and Its History
  • 0:39 Federal Minimum Wage
  • 1:33 State Minimum Wage
  • 2:15 Advantages of Minimum Wage
  • 3:42 Lesson Summary
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Federal Minimum Wage

Let's look at a chart showing how the federal minimum wage has increased over the years:

inflation adjusted minimum wage

The grey line shows the minimum wage unadjusted for inflation; whereas, the blue line shows you what it would be worth in 2020 dollars. When first created, the minimum wage in 1938 was $0.25. Adjusted for inflation, it would be worth $4.65 today. The minimum wage had its lowest buying power in 1948, when it was worth about $4.40 in today's dollars. It had its highest buying power in 1968, when it was worth about $17.58.

Some jobs are exempt from the minimum wage. A good example is employees who work for tips. These employees can be paid a minimum of $2.13 per hour, as long as the hourly wage plus tipped income results in a minimum of $7.25 per hour.

State Minimum Wage

Federal legislation does allow for states to set their own minimum wage for certain jobs. Below are the requirements that must be met before a state's minimum wage can be used in place of the federal requirements:

  • The job is not subject to the federal Fair Labor Standards Act
  • The organization has revenue of less than $500,000 per year
  • The organization is not engaging in any interstate commerce

Of the 45 states that do set their own minimum wage, the rates vary greatly. Some are well above the federal amount and some are below. Most states set their minimum wage based on the cost of living for their area.

Advantages of Minimum Wage

There are advantages to having a government that enforces a minimum wage standard. According to Arnold Anderson in an article from the online Houston Chronicle, some of these advantages include:

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