# Minimum Wage: Federal vs. State, Exceptions

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> **Definition**
>
> Minimum wage is the lowest hourly wage that employers must pay nonexempt workers, as established by federal law but subject to upward revision by state and local regulations.

A minimum wage is the lowest wage that a worker may be paid per hour. It's a price floor on hourly wages mandated by federal law. [Nonexempt workers](https://www.investopedia.com/terms/n/nonexempt-employee.asp) can't be offered a job or agree to work for less than this amount.

Minimum wages are set by the federal government and by states. They've been at the center of many debates.

### Key Takeaways

*   The minimum wage is a legally mandated base pay for nonexempt hourly workers.
*   The federal minimum wage in the United States as of 2025 is $7.25 per hour.
*   States and local municipalities can set their own minimum wage rates, but they must be above the federal rate.
*   21 states increased their minimum wages effective January 2025.

## Understanding Minimum Wages

The federal minimum wage in the United States is $7.25 per hour as of 2025 unless the worker falls into a category that's specifically exempted from the [Fair Labor Standards Act (FLSA)](https://www.investopedia.com/terms/f/fair-labor-standards-act-flsa.asp).

The government periodically assesses the federal minimum wage level with changes in [inflation](https://www.investopedia.com/terms/i/inflation.asp) or the [cost of living](https://www.investopedia.com/terms/c/cost-of-living.asp). However, the federal minimum wage [has not increased](https://www.investopedia.com/articles/personal-finance/022615/can-family-survive-us-minimum-wage.asp) since July 2009.  

> **Important**
>
> Former President Joe Biden campaigned on a promise to raise the federal minimum wage for government workers to $15 an hour. The executive order was signed on April 27, 2021, and was implemented on Jan. 30, 2022.

## History of the Minimum Wage

The first minimum wage laws came into effect in the late 1800s when sweatshop labor was common in newly industrialized countries. Minimum wages were a central demand for the new [union movement](https://www.investopedia.com/financial-edge/0113/the-history-of-unions-in-the-united-states.aspx), along with shorter hours and better working conditions.

The first national minimum wage was enacted by New Zealand in 1894, followed by the United Kingdom in 1909.

The first minimum wage law in the United States went into effect in 1912 when Massachusetts set a minimum hourly rate for women and children under age 18.

Labor organizers advocated for minimum wages in the United States, but they faced challenges from business interests. Several states attempted to pass minimum wage laws but they were rebuffed by a 1923 Supreme Court decision that declared minimum wage laws to be unconstitutional.

It wasn't until the New Deal that Congress enacted a federal minimum wage law. The Fair Labor Standards Act that was passed in 1938 set the minimum wage at $0.25 per hour. That wage was worth $5.55 as of November 2024 if you adjust it for [inflation](https://www.investopedia.com/terms/i/inflation.asp).

The Fair Minimum Wage Act of 2007 ordered the minimum wage to be raised from $5.15 in three increments. It rose to $5.85, $6.55, and then finally to $7.25, where it stands in 2025.

## Federal Minimum Wage vs. State Minimum Wages

The United States enforces a federal minimum wage but individual states, cities, and localities can enact [different minimum wage requirements](https://www.investopedia.com/articles/investing/080515/top-5-us-cities-highest-minimum-wage.asp) provided that the stipulated hourly wage is not lower than the federal minimum wage. An employer who is subject to the federal and state minimum wage requirements must pay the higher of the two.

[States usually set a minimum wage](https://www.investopedia.com/what-full-time-employees-make-a-year-on-minimum-wage-11752171) that is reflective of the cost of living in the region. The state of Connecticut has a minimum wage of $16.35 for non-tipped workers as of Jan. 1, 2025, and Montana has a minimum wage rate of $10.55 as of that date.

Minimum wage rates exceed the federal rate in 30 states and the District of Columbia as of January 2025. The District of Columbia has the highest minimum wage at $17.50 per hour. The second highest is Washington at $16.66.  

> **Fast Fact**
>
> Only five states have not adopted a state minimum wage as of Jan. 1, 2025: Alabama, Louisiana, Mississippi, South Carolina, and Tennessee.

Seven states have no state minimum and two, Georgia and Wyoming, have a minimum wage that is less than the federal minimum. In all cases, the federal minimum wage of $7.25 applies.

Some states have special exceptions to their minimum wage rules:

*   Georgia and Wyoming both have a minimum wage of just $5.15 but employees covered under the FLSA are subject to the federal minimum wage of $7.25.
*   The minimum wage in Oklahoma is $2 for employers with fewer than 10 full-time employees at any single location and for employers with $100,000 or less in annual gross sales regardless of their number of employees.
*   Florida residents voted in November 2020 to increase the state’s minimum wage incrementally beginning at $10 per hour on Sept. 30, 2021, until it reaches $15 per hour in September 2026. It's at $13 as of Jan. 1, 2025.
*   Residents of Nebraska passed legislation to raise the minimum wage there to $15 an hour in 2026. It's at $13.50 as of Jan. 1, 2025.

## Municipal Minimum Wages

Cities and municipalities may set a higher minimum wage for residents who live in areas with higher costs of living. For example, the city of Chicago's minimum wage is $16.20 for employers with four or more workers as of July 2024. The Illinois state minimum wage is $15 as of Jan. 1, 2025.  

## Minimum Wage Exceptions

Certain categories of workers are exempt from being covered by minimum wage laws.

### Tipped Workers

Low-wage laborers in the United States can be exempt from the minimum wage if a sizable portion of their income is derived from [tips](https://www.investopedia.com/terms/t/tipincome.asp). A lower minimum wage of $2.13 per hour as of July 1, 2024 may apply to tipped employees who regularly receive more than $30 in tips per month (or if the total tips retained in addition to the hourly wage rate are equal to or greater than the federal minimum wage).

The employer is expected to compensate the employee for the shortfall if the employee’s total tips and hourly rate fall below the minimum wage.

### Students

A full-time student working for a university, retail store, or service establishment cannot be paid less than 85% of the minimum wage. Students can work up to eight hours per day but they can't work more than 20 hours per week when school is in session. Students in technical or vocational programs can't be paid less than 75% of the minimum wage throughout their active enrollment in the program.

### Employees Under 20 Years Old

Workers under the age of 20 may be paid $4.25 per hour by federal law until they pass 90 consecutive calendar days of employment. The employer must convert their pay structure to the federal minimum wage rate after that.

### Workers With Physical or Mental Disabilities

Workers with physical or mental disabilities can be paid less than the federal minimum wage, according to the terms of the FLSA. Disabilities that can affect production capacity include blindness, cerebral palsy, alcohol and drug addiction, mental illness, and developmental disabilities.

### $15 per Hour

Several companies pay a minimum wage of at least $15 per hour. They include Amazon, Bank of America, Costco, Chipotle, CVS, and Starbucks.

## The $15 Minimum Wage

The establishment of a $15 federal minimum wage has been a topic of much debate. Former President Joe Biden’s [American Rescue Plan](https://www.investopedia.com/american-rescue-plan-definition-5095694) attempted to raise the minimum. However, the Biden administration only succeeded in raising the minimum wage for government employees to $15 per hour (increased to $17.75 per hour beginning Jan. 1, 2025).

Proponents argue that an increase would help make the minimum wage a [living wage](https://www.investopedia.com/terms/l/living_wage.asp)—that is, it would be enough for workers to have a satisfactory [standard of living](https://www.investopedia.com/terms/s/standard-of-living.asp). They also claim that a raise would boost worker productivity, reduce income inequality, spur economic growth, and improve employee retention.  

Critics say that companies, not the government, should decide how much their employees are paid. They add that a minimum wage doesn't always increase the spending power of a population and can instead lead to higher [unemployment](https://www.investopedia.com/terms/u/unemployment.asp).

A small change in the price for low-wage labor could have a large effect on employer demand, they say, leading to increasing unemployment among low-wage workers. Critics also note that minimum wage laws may lead to job outsourcing—that is, companies may decide to move their facilities to countries where labor costs are lower.

## What Is a Living Wage?

A living wage is the minimum income deemed necessary for a worker to meet their basic needs. It's calculated based on factors such housing costs, transportation costs, and childcare costs.

The [purchasing power](https://www.investopedia.com/terms/p/purchasingpower.asp) of minimum wage workers peaked in 1968, according to the _Seattle Times._ Inflation and price increases after that point caused the real earnings of minimum wage workers to fall as productivity increased.

## What Are Efficiency Wages?

[Efficiency wages](https://www.investopedia.com/efficiency-wages-5206757) are the level of wages paid to workers above the minimum wage to retain a skilled and efficient workforce. Efficiency wage theory posits that an employer must pay its workers highly enough that workers are incentivized to be productive and that highly skilled workers don't quit.   

## Which State Has the Lowest Minimum Wage?

Georgia and Wyoming have a minimum wage of $5.15. However, employers in these states that are subject to the Fair Labor Standards Act must pay their employees the $7.25 federal minimum wage. The same rules apply to the five states that have no minimum wage: Alabama, Louisiana, Mississippi, South Carolina, and Tennessee.

## The Bottom Line

The Fair Labor Standards Act (FLSA) established the minimum wage, which is $7.25 per hour as of January 2025. The government periodically assesses the federal minimum wage level but the rate has not increased since July 2009. Individual states, cities, and localities can pass minimum wage requirements that are different from the federal rate as long as their rate is higher than the federal minimum wage. 

> **Article Sources**
>
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>     
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>     
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>     
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>     
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>     
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>      
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>      
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>      
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>      
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>      
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>      
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>      
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>      
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>      
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>      
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>      
> 25.  Seattle Times. "[$7.25 an Hour: The Federal Minimum Wage Peaked in Purchasing Power in 1968](https://www.seattletimes.com/opinion/7-25-per-hour-the-federal-minimum-wage-peaked-in-purchasing-power-in-1968/)."