The federal minimum wage was created by the Fair Labor Standards Act of 1938 to set a pay floor for covered workers. Congress raises it by passing new laws, and the last federal increase took effect on July 24, 2009, when it reached $7.25 per hour. The federal cash wage for tipped employees is $2.13 per hour, as long as tips bring them to at least $7.25. Learn the basics in our minimum wage glossary entry.
States and cities can set higher rates, and when they do, employers must pay the highest rate that applies. Many states have rates well above the federal level, and a number of them adjust their rate every year for inflation. Some cities and counties set their own, even higher, rates.
The most direct effect is higher pay for people at or near the minimum, which helps them keep up with housing, food and transportation costs.
Lower-income households tend to spend most of what they earn, so supporters argue a raise flows back into local businesses.
Better pay can make employees less likely to leave for small raises elsewhere, which lowers hiring and training costs and keeps experienced staff on the floor.
Supporters argue higher wages can reduce the number of full-time workers who also need public benefits.
A fixed minimum wage loses buying power as prices rise. Periodic increases or inflation indexing restore some of it.
Workers who feel fairly paid may be more engaged and more careful with customers.
Payroll is often one of the largest costs for restaurants, retail and service businesses. A higher wage also raises payroll taxes and, often, workers’ compensation premiums tied to payroll.
Critics argue some employers respond by cutting hours, hiring fewer people or delaying new positions.
Businesses may pass part of the cost on to customers, which can affect sales in price-sensitive markets.
Higher labor costs can speed up the use of self-checkout, kiosks and online ordering.
Larger companies often have more room to absorb cost increases than small, thin-margin businesses.
When the floor rises, experienced employees may earn close to new hires, creating pressure to raise other wages too. See wage compression.
| Area | Argument for | Argument against |
|---|---|---|
| Workers | Higher take-home pay | Possible fewer hours or jobs |
| Businesses | Lower turnover, more spending | Higher payroll and tax costs |
| Customers | Better-staffed, more stable teams | Possible price increases |
| Economy | Wages keep pace with prices | Uneven effects across regions |
Economists continue to debate the size of these effects, which can vary by industry, region and the size of the increase.
Example: 12 hourly employees each work 30 hours a week and get a $1.00 per hour raise.
Use the same steps with your own numbers, or see how to calculate labor cost.
EZTime’s time clock and payroll-ready exports show actual labor hours by shift, so you can see the real effect of a new rate.
$7.25 per hour. It has not changed since July 24, 2009. Many states and cities set higher rates, and employers must pay the highest rate that applies.
Higher income for low-wage workers, more consumer spending, lower turnover and wages that keep up with rising prices.
Higher labor costs, which may lead to fewer hours or slower hiring, higher prices, more automation and pressure on small businesses.
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Updated November 2026. General information only; not legal advice.