What Is the Minimum Wage?
In the United States, the minimum wage is the lowest hourly rate a covered employer is legally required to pay an employee. It is established by the Fair Labor Standards Act (FLSA) at the federal level and can be supplemented by state and local laws that set higher rates.
When a state or city has a higher minimum wage than the federal one, covered workers earn the higher rate. The federal floor only applies where no higher rate is in force. As of 2025, approximately 1.6 million Americans were earning the federal minimum wage.
How the Minimum Wage System Works
Federal Baseline
The FLSA sets the federal floor at $7.25. States and localities can set higher rates but not lower ones — all covered employers must pay at least the highest applicable rate.
State Variation
States establish their own minimum wage laws. Some automatically adjust for inflation each year. Others require legislative action to change, which is why the federal rate has not changed since 2009.
Exceptions
Tipped workers have different federal rules (currently $2.13/hr with tips expected to close the gap). Youth workers, trainees, and very small businesses engaged only in intrastate commerce may also have exceptions.
Example — Georgia: Georgia’s state minimum wage is technically $5.15 per hour. However, because most Georgia workers are covered by the FLSA, they earn $7.25 — the higher federal rate. The state minimum wage exists primarily as a political signal; in practice it is irrelevant for the vast majority of workers.
Some states intentionally set a lower minimum wage than the federal one, knowing the federal rate will override it for covered workers. The lower state rate applies only to the narrow category of workers not covered by the FLSA — primarily those at very small, purely local businesses.
Cities can set their own rates: In addition to state rates, many cities have established their own minimums that exceed the state rate. Seattle’s minimum wage is $20.76 per hour in 2025, more than double the federal rate. Employers must track which rate applies in each location where they have workers.
The Policy Debate
The minimum wage remains one of the most actively debated economic policy questions in American politics. The two sides of the debate reflect genuinely different views about how labor markets work:
Arguments for Raising It
- Would reduce the poverty rate among working adults and families
- Stimulates consumer spending as lower-wage workers spend a higher share of their income
- Reduces dependence on government assistance programs
- The federal rate has lost significant purchasing power since 2009 due to inflation
- Many states have raised rates without measurable negative employment effects
Arguments Against Raising It
- Higher labor costs may lead employers to reduce hours or headcount
- Can accelerate automation and technology adoption in low-wage industries
- May cause price inflation as businesses pass costs to consumers
- A national rate ignores wide variation in regional cost of living
- May be especially burdensome for small businesses with narrow margins
In countries that tie the minimum wage to inflation — as Washington State does through its CPI-linked adjustment mechanism — the rate rises automatically each year without requiring legislation. In the US at the federal level, Congress must act to change the rate, which is why it has remained at $7.25 since 2009.
A Brief History
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1938
President Franklin D. Roosevelt signed the Fair Labor Standards Act, establishing the first federal minimum wage at 25 cents per hour. It applied to about 20% of workers — primarily those engaged in interstate commerce. Created in response to the Great Depression as a stabilization measure.
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1968
Coverage was extended to cover approximately 80% of private sector workers. This remains roughly the scope of coverage today.
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1968 peak
The minimum wage reached its highest real (inflation-adjusted) value in history at $1.60/hr in 1968, equivalent to roughly $14–$15 in 2024 dollars. The federal minimum wage has not returned to this real-dollar level.
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2009
Congress last raised the federal minimum wage from $6.55 to $7.25 per hour — the rate that remains in effect today. In the 15+ years since, inflation has significantly eroded its purchasing power.
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2024–now
With no federal action, states continue to diverge. Washington State’s rate rose from $16.28 (2024) to $16.66 (2025) to $17.13 (2026), tied to the Consumer Price Index. Washington D.C. reached $17.95. The gap between the federal floor and the leading state rates has never been wider.
Congress has raised the federal minimum wage 22 times since its creation in 1938. The longest the rate has gone unchanged was the period from 1997 to 2007 (10 years), followed by the current period from 2009 to the present.
Minimum Wage & Retirement Planning
For those earning at or near minimum wage, retirement planning presents a particular challenge: there is less margin between income and essential expenses, making it harder to direct money toward long-term savings. But several principles apply regardless of income level:
Every dollar saved compounds over time. Even small, consistent contributions to a Roth IRA or employer-sponsored plan make a meaningful difference over decades. The Rule of 72 illustrates exactly how powerful even modest savings are when given enough time. If your employer offers a 401(k) match, capturing it fully is a priority regardless of wage level — it is the highest guaranteed return available. Contact us to explore retirement planning options appropriate for any income level.