Minimum Wage

What Is a Minimum Wage?

A minimum wage is the lowest hourly pay that an employer is legally allowed to pay most workers. It is set by law, usually by a national government, although some countries let states, provinces, or cities set higher or separate rates. Employers may pay more than the minimum, but they cannot pay covered workers less. Some jurisdictions set different rates for younger workers, apprentices, or employees who receive tips.

How It Works

Minimum wage laws define which workers are covered, which employers must comply, and how the rate changes over time. In the United States, the federal minimum wage was established by the Fair Labor Standards Act of 1938. Many states and cities have set higher rates, and where a state or local rate is higher than the federal one, the higher rate generally applies. Some governments adjust the rate periodically to account for inflation. Others set rates by industry or region through government boards or through negotiations involving employers and unions, a process known as collective bargaining.

Why It Matters to Investors

Minimum wage changes affect labor costs, especially for businesses that employ many hourly workers, such as restaurants, retailers, and hospitality companies. Higher required pay can shrink a company's profit margin unless it raises prices, improves productivity, or reduces staffing. Investors often consider proposed increases when analyzing these sectors. The effect depends on how much a company relies on minimum-wage labor and whether it can pass the added cost on to customers.

The Economic Debate

Economists disagree about the effects of minimum wages. Supporters argue that a wage floor raises incomes for low-paid workers, can reduce poverty, and may increase consumer spending. Critics argue that a higher floor can reduce hours or hiring, particularly for inexperienced workers, and may encourage businesses to automate tasks. Supporters often point to the goal of a living wage, meaning pay sufficient to cover basic costs. Research findings vary with the size of the increase, local economic conditions, and the time period studied, so results are not uniform across studies.