Minimum wage: What is it? Why does it matter?

Minimum wage is one of the pillars of labor law to ensure that employees are given an equitable payment for the work that they do. First introduced for the U.S. under the Fair Labor Standards Act of 1938, minimum wage has been an economic and political issue of discussion ever since.

Although the debate continues over minimum-wage increases, inflationary raises, and living wages, it is useful to be aware of the way minimum-wage law works as it applies to employers and employees.

What is the minimum wage?

At first glance, the idea is straightforward: it’s the lowest hourly rate a business can legally pay its staff. But as any multi-state employer knows, the simplicity stops there.

In reality, the system works in layers. At the federal level, there’s a floor — a base rate that applies across the country unless a state has set its own (and many have). Then, within some of those states, individual cities or counties go a step further, establishing local wage requirements that beat both state and federal levels.

So what does this mean in practice? For businesses, it means compliance is deeply tied to geography. What flies in one region might be illegal in the next. For HR and comp teams, it’s not just about ticking a legal box — it’s about designing pay strategies that align with both regulation and values.

Beyond the legal framework, there’s a bigger-picture rationale too. These laws exist to ensure workers aren’t underpaid or exploited. They help level the playing field — not just by increasing take-home pay, but by injecting more disposable income into the economy. That extra spending power ripples outward: stronger communities, healthier consumer demand, and yes, even more sustainable business growth.

Why does the minimum wage matter?

This isn’t just policy. It’s people’s livelihoods. And for leaders shaping organizational culture and workforce planning, it matters on multiple fronts.

At its core, the minimum wage is about drawing a line — saying, this is the least we’re willing to pay someone for their time, energy, and effort. It’s a safeguard, but also a statement of intent. Here’s what’s behind it:

• Worker protection: It limits how far compensation can fall, keeping the worst types of labor exploitation at bay.
• Fighting poverty: By raising the wage floor, it gives lower-income workers a better shot at covering basic needs — rent, groceries, childcare.
• Stimulating demand: More money in workers’ pockets often translates into more spending — and that drives business activity.
• Fairness in pay: It nudges companies toward more balanced compensation structures, especially for entry-level roles.
• Reducing inequality: As the wage floor rises, the distance between top earners and those at the bottom narrows — at least a bit.
• Promoting social equity: Over time, these efforts help chip away at broader income disparities across demographic and geographic lines.

It’s not a perfect system. And it’s not a silver bullet for deeper economic problems. But it’s one piece of a larger puzzle around workforce dignity and long-term sustainability.

Who qualifies — and how is it applied?

In principle, the law says: minimum wage applies to everyone. But in real life, there are nuances. Here’s a breakdown of how it typically plays out:

• Non-Exempt workers: Covered by the FLSA, earn minimum wage, receive overtime.
• Workers who are compensated at a lower base salary with tips covering the remaining difference.
• Youth workers: May be paid at subminimum wage for the initial 90 days of work.
• State & regional variations: Some states have higher minimum levels than federal law.
• Independent contractors: Not covered by the minimum wage protection as they are deemed to be independent/self-employed.

How is Minimum Wage Calculated?

Minimum wage varies by level of government and region. Here’s how it is determined:

Federal Minimum Wage calculation

• Set by Congress, currently $7.25 an hour (since 2009).
• They require legislative endorsement.

City & Municipal Minimum Wages

• They establish their own higher rates (e.g., $16.00/hr as of 2024, for California).
• Even more than this is possible in cities such as New York City or Seattle.

Making the Minimum Wage Changes: Considerations

• Cost of living: Salary increases tend to reflect increasing cost of living.
• Inflation Adjustments: Certain states tie minimum wage to inflation.
• Economic conditions: The government considers job creation and business effects before making changes.

Myung-soon: The minimum salary

• Living wage: The minimum required level of income to meet essential needs (food, housing, health care).
• Minimum wage: A statutory minimum, some portion of which shall be less than living wage.

The Federal minimum wage

This is the baseline requirement for all employers in the U.S.:

• Current rate: $7.25 an hour (since 2009)
• Governing law: Fair Labor Standards Act (FLSA)
• Tipped employees: $2.13 an hour plus tips to make up the difference.

State and local minimum wages

State and local governments may set their own higher wage levels:

• 29 states have minimum wages above those of the federal government.
• Some locales (such as San Francisco, New York City) have higher local minimum wages.

Preemption laws

In certain states, local authorities are prohibited from setting their own minimum wage: In certain states, it’s illegal for cities to establish their own minimum wage.

Impacts on businesses

Minimum wage increases impact different sectors in different ways.

Small business challenges 

• A higher cost of labor may reduce employment or necessitate firing.
• Higher prices for products as well as services could be required to help offset expenses.

Mass business adoption

• Companies raise salaries intentionally to hire employees.
• Automation has the ability to reduce the companies’ dependency on manpower.

Industry-specific impact

• Retail/Hospitality Sector – Most badly affected, as they have large numbers of minimum pay employees.
• Tech & Finance – Not necessarily, as those types of positions typically make significantly more than minimum wage.

Impact on employees

Wage increases can affect employees both positively and negatively:

Poverty & income inequality

• Higher incomes reduce the level of poverty.
• They assert that employment losses are balanced by gains made through higher salaries.

Cost of living

Higher incomes make affordability possible, but increase cost (inflationary effect).

Career opportunities

• Redundancies when firms are unable to provide salary rises.
• Increased encouragement of companies to invest more in automated technology.

Employee morale & productivity

Better pay can be used to raise job satisfaction and lower turnover.

HR’s role to ensure wage compliance

HR plays a critical role in ensuring employers are following laws:

• Maintaining compliance: HR ensures the compensation remains compliant with federal, state, and local minimum wage laws.
• Processing payroll: Delivers accurate wages, benefits, and tax withholdings.
• Wage communication: Informs employees about varying changes to their wages.
• Recruitment & retention: Aligns recruitment strategy to salary trends
• Multi-state operations: Updates salary rates for companies operating across multiple states.

The evolving future of minimum wage

This isn’t a conversation that’s going away anytime soon — if anything, it’s picking up steam and getting more complex. Across the U.S., we’re seeing a steady rollout of phased wage increases at both state and city levels. These aren’t overnight changes. They’re often planned years in advance, giving employers time to recalibrate budgets and pay structures. But they still require constant attention.

At the same time, there’s a push gaining traction: linking minimum wage hikes directly to inflation. The logic is simple — instead of needing fresh legislation every few years, the rate would adjust automatically to reflect rising costs of living. It’s a way to make the system more agile, though it introduces new forecasting challenges for finance and HR teams alike.

Then there’s the bigger-picture discussion unfolding: Should the U.S. transition toward a national “living wage”? That is, a wage floor that’s not just legally sufficient, but actually tied to the real cost of housing, food, healthcare, and transportation. Some proposals set the benchmark at $15 per hour nationwide. Others argue for keeping it flexible, letting states tailor solutions based on their economic realities.

One thing’s certain: minimum wage remains a cornerstone — not just of employment law, but of the broader economic framework. It affects how companies hire, how people live, and how whole industries evolve.