How is the Minimum Wage Determined?

Michael Pollick
Michael Pollick

Ever since its inception in the 1930s, the US federal minimum wage has been a lightning rod for controversy and seemingly endless debate amongst lawmakers. Historically, the Democratic party has generally been the one to propose adjustments to it, which would largely benefit workers, while the Republican party has sought to put caps on the amount of the raise, which largely benefits employers. Depending on which political party is in control of Congress, the minimum wage may not be adjusted for years, or it might be adjusted any number of times in a decade.

Possible lay-offs is commonly used as an argument against raising the minimum wage.
Possible lay-offs is commonly used as an argument against raising the minimum wage.

Determining the actual minimum wage was originally supposed to be the job of an oversight committee. This board composed of lawmakers, economists and business leaders would consider the current social and economic climate to determine if an adjustment was necessary. Such factors as the unemployment rate, inflation rate, and average family incomes would theoretically determine the lowest living wage and the federal minimum would be adjusted accordingly. This is how it was supposed to work on paper, anyway.

In the United States and other industrialized countries, people who work at minimum-wage jobs often live in poverty.
In the United States and other industrialized countries, people who work at minimum-wage jobs often live in poverty.

In reality, there has never really been an established formula for determining the federal minimum wage. Some sources believe that it is calculated as a certain percentage of the current poverty line for a family of four, but in recent years that has not proven to be the case. Currently, it is not indexed to the rate of inflation, either. There have been efforts to tie the minimum wage to the annual inflation rate, but those proposals have not been adopted. In fact, the most recent raise, adopted by Congress in 2007, does not even match the actual spending power of the 1979 adjustment.

Realistically, the amount of the minimum wage is largely determined by the sponsor of the bill designed to adjust it. A proponent of raising it might routinely introduce bills in the Senate to that effect. Many of those bills may die in committee, or not receive enough support from the opposite political party. Once in a while, however, a bill does survive the initial process and a committee is formed to study the proposal.

It is during this review process that a final minimum wage level may be determined. Opponents and lobbyists often present their objections to raising the wage, citing increases in labor costs, possible lay-offs and a general raise for workers currently working just above the current minimum. Proponents may argue that the wage should be adjusted to keep pace with the actual cost of living, or to encourage the poor to choose work over public assistance programs. By the end of these discussions, a new federal minimum wage usually emerges. As a concession to employers, however, the new wage is generally phased in over a number of years.

Perhaps one day the amount will be indexed to a standard economic indicator such as inflation or the annual poverty line, but until then any raise will most likely be tied to the political climate in place at the time.

Because servers make tips, they are generally exempt from minimum wage laws in the U.S.
Because servers make tips, they are generally exempt from minimum wage laws in the U.S.
Michael Pollick
Michael Pollick

A regular wiseGEEK contributor, Michael enjoys doing research in order to satisfy his wide-ranging curiosity about a variety of arcane topics. Before becoming a professional writer, Michael worked as an English tutor, poet, voice-over artist, and DJ.

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Discussion Comments


@anon928494: Not all minimum wage jobs are entry level or require no experience/special skills. That being said, I do agree that asking to make more money than the work you do is not helpful. However the issue I have is that in cases the minimum wage does not equivocate to the minimum cost of living.


Why does everyone overlook the fact that "minimum wage jobs" are entry level positions that require absolutely no experience or special skills? If these individuals that make minimum wage want a better standard of living, why not go to school? They are eligible for pell grants because of their income situation. Or if these individuals don't want to go to school they need to set themselves apart to move up in the company. If you're not working to improve your situation why should you be entitled to more money for a simple job?

Raising the minimum wage only causes a raise in the cost of

living that hurts individuals who worked hard to make a higher wage. If they raise minimum wage to $10.10 per hour, companies will pass that increase down to customers, and the wage increase becomes moot. As a result, people who worked hard to make $20 per hour will make less.


Minimum wage is often not applied properly and in turn is becoming such a large issue.Many companies pay workers minimum wage which does not reflect the work that is performed. Company executives pocket more money, while the workers barely scrape by. Equal pay for equal work should really be enforced.


In Russia today, the minimum wage covers only 27 percent of what is needed to sustain an adult of working age. in the Soviet Union, the minimum wage amounted to one-and-a-half times the minimum required consumption. That's because production was more than enough to cover people's needs.


Do you two understand the principles of the free market? By raising the minimum wage (to what you arbitrarily think is "enough") consequently raises prices of labor, which raises the price of products, which (surprise!) raises the cost of living.

Or perhaps you two could care less for capitalism and would rather join a socialistic nation. May I ask, in what time in the history of the world has socialism been a success? The Nazis? (Nationalized Socialist Party) Or maybe the Soviet Union that implemented communism -- a form of socialism.


Are we actually comfortable with some of our democratic society living at the poverty level? It is impossible for someone, much less a family, to live on this amount without relying on some sort of welfare to help with housing, food, and insurance.

It is disgraceful that in a country as wealthy as America, that the system sets people up to fail rather than succeed. Whatever happened to the land of opportunity?


The minimum wage is determined by some politician pulling a number out of his/her ... er, um, thin air, yeah, that's it, thin air! in order to buy votes.

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