:max_bytes(150000):strip_icc()/GettyImages-1156873310-c133cc03217a4bd7b59b9dc53dbb9a42.jpg "Do Minimum Wage Laws Make Labor a Fixed or Variable Cost?")
The cost of doing business includes any expense related to running a company. One of the major expenses that companies have is labor, which some experts suggest can be as high as 70%. Labor costs include human resources (HR), employment-related taxes, and compensation.
The latter category includes any kind of remuneration to management, employees, and other workers, such as bonuses, stock plans, and employee salaries. Wages make up a big portion of labor expenses, including minimum wages, which is considered a semi-variable cost. We explain why below.
Key Takeaways
- A minimum wage is the lowest wage an employer can pay an hourly worker for duties performed while on the job.
- Minimum wage is considered a semi-variable cost.
- The base minimum wage rate makes the expense fixed while any additional pay for extra hours worked is considered variable.
What Is a Minimum Wage?
The term minimum wage refers to the lowest wage an employer is legally required to pay an employee for work and other duties completed during a certain period. Most employees who receive a minimum wage are paid on an hourly basis. Since they are paid hourly, employees who receive minimum wage do not receive an annual salary.
Depending on the location and circumstances, the minimum wage threshold can be set by one of the following:
- Governments through laws and statutes
- Labor courts or tribunals
- Wage boards or councils
This amount “cannot be reduced by collective agreement or an individual contract.”
Minimum wage laws were created in most countries to prevent workers from being exploited. They also ensure that people who earn the least don’t fall below the federal poverty line (FPL). The federal minimum wage in the United States is $7.25 as of January 2024. There have been attempts to raise the federal minimum wage to $15 but that move only applies to federal contract workers rather than all hourly employees.
State minimum wages may be different as highlighted in the table below. A total of 22 states raised their minimum wages on Jan. 1, 2024. Others either plan to raise or will keep their minimum wage rates in place. Hourly employees receive the higher of the federal and state minimum wages. So if a state’s minimum wage is $15, the employee receives $15 per hour rather than the federal minimum wage of $7.25.
| Minimum Wages by State (as of January 2024) | |
|---|---|
| Alabama | None |
| Alaska | $11.73 |
| Arizona | $14.35 |
| Arkansas | $11.00 |
| California | $16.00 |
| Colorado | $14.42 |
| Connecticut | $15.69 |
| Delaware | $13.25 |
| District of Columbia | $17.00 |
| Florida | $12.00 ($13 as of September 2024) |
| Georgia | $7.25 |
| Hawaii | $14.00 |
| Idaho | $7.25 |
| Illinois | $14.00 |
| Indiana | $7.25 |
| Iowa | $7.25 |
| Kansas | $7.25 |
| Kentucky | $7.25 |
| Louisiana | None |
| Maine | $14.15 |
| Maryland | $15.00 |
| Massachusetts | $15.00 |
| Michigan | $10.33 |
| Minnesota | $10.85 ($8.85 for small employers) |
| Mississippi | None |
| Missouri | $12.30 |
| Montana | $10.30 |
| Nebraska | $12.00 |
| Nevada | $11.25 ($12.00 as of July 1, 2024) |
| New Hampshire | $7.25 |
| New Jersey | $15.13 |
| New Mexico | $12.00 |
| New York | $16.00 (New York City, Long Island, Westchester), $15.00 (rest of New York State) |
| North Carolina | $7.25 |
| North Dakota | $7.25 |
| Ohio | $10.45 |
| Oklahoma | $7.25 |
| Oregon | $14.20 |
| Pennsylvania | $7.25 |
| Rhode Island | $14.00 |
| South Carolina | None |
| South Dakota | $11.20 |
| Tennessee | None |
| Texas | $7.25 |
| Utah | $7.25 |
| Vermont | $13.67 |
| Virginia | $12.00 |
| Washington | $16.28 |
| West Virginia | $8.75 |
| Wisconsin | $7.25 |
| Wyoming | $7.25 |
Minimum wages in U.S. territories also vary. They are as follows:
- Guam: $9.25
- Northern Mariana Islands: $7.25
- Puerto Rico: $9.50
- Virgin Islands: $10.50
Rates in American Samoa vary based on the industry
Minimum Wage as a Semi-Variable Cost
Expenses are the cost of running a business. These costs can be classified as fixed or variable. Fixed costs are any expenses that remain the same regardless of how much a company produces. This means the cost never changes even when the number of goods and services increases or decreases. Examples of fixed costs include rent, insurance, and interest payments.
Variable costs are any costs that change or fluctuate based on a company’s output. As such, the amount of variable costs changes when production changes. Costs drop when production drops and, similarly, costs rise when production increases. These expenses include things like raw materials and utilities.
Labor costs, including minimum wage expenses, are considered semi-variable. Semi-variable costs have components of both fixed and variable costs. The cost of labor is always something that companies can expect to have but the amount they pay may vary. This makes it both fixed and variable. When we look at minimum wages, the base rate is what remains fixed while any additional time that workers spend on the job makes the expense variable.
Example of Minimum Wage as a Semi-Variable Cost
Here’s a hypothetical example to show how minimum wages qualify as semi-variable costs. Let’s say the variable costs in a factory that makes dresses are the fabric and labor used to make the dresses.
Assuming the company employs 10 laborers, and the minimum wage in the state is $8, the company has a fixed cost of salaries of $80 per hour. If it takes six hours for a laborer to make a dress with eight yards of fabric, then two laborers would make two dresses in 12 hours and use 16 yards of fabric. An increase in the number of dresses (production) means there must have been an increase in the number of laborers and the size of the fabric used.
If the company requires every employee on the floor to work six hours each day, the fixed cost for the company per day is $48 if it pays minimum wage. If the size of the fabric required to make a dress is eight yards, then the company has a fixed cost of 80 yards per day for each worker.
But if a worker works for more than six hours each day, the extra amount paid is a variable cost because the worker is free to determine how many extra hours to spend working. The worker may also want to work extra time on a specific day but is free to choose whether to work on a different day.
What Is the Federal Minimum Wage?
The federal minimum wage for non-exempt hourly employees is $7.25 per hour. Tipped employees receive a minimum wage of $2.13 per hour. If the total amount they receive plus tips falls below $7.25 per hour, the employee is responsible for the shortfall.
The federal minimum wage is different from the minimum wages set by individual states. Employees receive the higher of the two if the federal and state minimum wages are different.
What’s the Difference Between Fixed and Variable Costs?
Fixed and variable costs are two types of costs associated with running a business. Fixed costs refer to any expenses that remain the same at any time, regardless of how many goods and services are produced. Variable costs, on the other hand, change in value when production increases or decreases. Examples of fixed costs include rent, insurance, and interest. Variable costs include items like raw materials, and utilities.
How Many States Have Minimum Wages Above $15?
Four states have minimum wages that are higher than $15 as of January 2024. They include California ($16.00), Connecticut ($15.69), New Jersey ($15.13), New York City/Long Island/Westchester ($16.00), and Washington ($16.28). The minimum wage in the District of Columbia is $17.00. Maryland, Massachusetts, and the rest of New York State all have minimum wages of $15.
The Bottom Line
Labor is an unavoidable cost of doing business. Employers must pay their employees for the duties they perform while on the job. Labor can be classified into different categories, such as the cost of human resources and different forms of compensation. Wages, including minimum wages, are considered semi-variable. While the base rate may be fixed, any additional money paid to employees for extra work makes it a variable cost.