A minimum wage is the lowest rate of pay that employers are legally allowed to pay workers, usually set per hour but in some countries per day or month. It is set by a government, often on the advice of an independent commission, or in some countries through binding sector-wide agreements negotiated by employers and trade unions. Its stated aims are to protect low-paid workers, reduce in-work poverty and limit the power of employers to push down wages.
The minimum wage is one of the most studied and most argued-over policies in economics. Supporters see it as a basic labor standard; critics worry it prices the least experienced workers out of jobs. It sits alongside other tools aimed at low incomes, such as tax credits, a negative income tax and welfare benefits, and is often discussed together with labor market flexibility.
Minimum wage in plain terms
Picture a high-jump bar that every job offer has to clear. An employer can pay as much above the bar as it likes, but it cannot offer less. People earning well above the bar barely notice it; for people whose pay would otherwise sit below it, it lifts their earnings directly.
The argument is about where to set the bar. Set it low and it changes little. Set it higher and some workers get a meaningful raise, but some employers may respond by hiring fewer people, cutting hours, raising prices or automating tasks. How much of each happens is an empirical question, and the answer depends on the level of the floor and the state of the local job market.
History and current rates
New Zealand introduced compulsory arbitration that set minimum pay in 1894, and Australia's state of Victoria created wage boards in 1896. The United States set a federal minimum of 25 cents an hour under the Fair Labor Standards Act of 1938. The federal rate has been $7.25 an hour since July 2009; many states and cities set higher rates. The United Kingdom introduced a national minimum wage in 1999; its top rate, the National Living Wage for workers aged 21 and over, rose to £12.71 an hour in April 2026. Germany introduced a statutory minimum in 2015 and raised it to €13.90 an hour on 1 January 2026, with €14.60 scheduled for 2027.
The European Union's Directive on adequate minimum wages (2022/2041) asks member states to review statutory minimums against reference values such as 60% of the gross median wage. In November 2025 the EU Court of Justice upheld most of it but annulled two provisions after a challenge brought by Denmark, where pay is set by collective agreement. India's Code on Wages, in force since 21 November 2025, provides for a national floor wage below which state minimum wages may not fall. In Pakistan, minimum wages are set by the provinces.
Measuring the bite: the Kaitz index
Because price levels and pay differ across countries, economists compare minimum wages with typical pay. The most common measure is the Kaitz index:
The minimum wage is the statutory hourly rate, and the median wage is the hourly pay of the worker in the middle of the earnings distribution.
For example, if the minimum is 12 an hour and the median is 18, the Kaitz index is 12 ÷ 18 ≈ 0.67, or two-thirds. The UK set its National Living Wage to reach two-thirds of median hourly pay for workers aged 21 and over by 2024. The US federal minimum is a much smaller fraction of US median pay.
The economic debate
In a simple competitive model of supply and demand, a wage floor above the market rate reduces the number of jobs, raising unemployment among low-skilled and young workers. In a market where employers have wage-setting power, a monopsony, a moderate minimum can raise both pay and employment, because it removes the employer's incentive to restrict hiring to keep wages low.
Evidence is mixed and heavily debated:
- Studies finding small effects. David Card and Alan Krueger's 1994 study of fast-food restaurants in New Jersey and Pennsylvania found no fall in employment after New Jersey raised its minimum. Card shared the 2021 Nobel Memorial Prize partly for this use of natural experiments. Much later research finds modest rises have little effect on total jobs.
- Studies finding job losses. David Neumark, William Wascher and others report negative employment effects, especially for teenagers and the least skilled, and argue that some studies use poor comparison groups.
- Official estimates. In February 2021 the US Congressional Budget Office estimated that raising the federal minimum to $15 by 2025 would raise pay for millions of workers and lift about 0.9 million people out of poverty, but reduce employment by about 1.4 million, with wide uncertainty around both numbers.
Employers may also raise prices, accept lower profit, cut hours or benefits, invest in automation or raise productivity. Critics on the free-market side, including many in the Chicago School, prefer targeted transfers because a minimum wage helps some workers in better-off households and may hurt those who lose jobs. Critics on the left argue that rates are often too low to cover living costs and campaign for a "living wage" set by the cost of a basic budget.
Enforcement and coverage
A minimum wage only works where it is enforced. Labor inspectorates investigate underpayment, and in the UK employers found underpaying are publicly named. Coverage gaps arise for workers classed as an independent contractor, for domestic and agricultural workers in some countries, and above all in the informal economy, where in many developing countries a large share of workers earn below the legal floor. Platform work in the gig economy has raised new questions about whether per-task pay meets hourly minimums once waiting time is counted.