Mildred Bailey was born Mildred Rinker on February 27, 1907, on a farm outside Tekoa, Washington. Her mother, Josephine, was a citizen of the Coeur d'Alene Tribe and taught her to play and sing; her father played fiddle and called square dances. Her great-grandfather, Bazil Peone, had been a song leader and head speaker of the Coeur d'Alene. The family lived near De Smet, Idaho, on the Coeur d'Alene Reservation, and moved to Spokane, Washington, when she was 13. Her mother died of tuberculosis at 36, and after her father remarried she left for Seattle to live with an aunt and uncle; a car accident there killed her aunt and left her with lasting physical and emotional injuries. Her younger brothers also worked in music: Al Rinker became a singer and joined the Rhythm Boys with Bing Crosby, Charles was a lyricist, and Miles played clarinet and saxophone before becoming a booking agent.

At 17 she moved to Seattle and worked as a sheet-music demonstrator at Woolworth's. A short first marriage, to Ted Bailey, gave her the surname she kept for her career. She toured with a West Coast revue, then found work in California at the radio station KMTR and at a Bakersfield speakeasy called The Swede's, and with the help of her second husband, Benny Stafford, became an established blues and jazz singer on the West Coast. In Gary Giddins's account of Crosby's early years, she found work in Los Angeles for her brother Al and Crosby, who had come down from Spokane to join her; she urged Crosby to hear Louis Armstrong and played him records by Ethel Waters and Bessie Smith. Crosby returned the favor by introducing her to the bandleader Paul Whiteman.

She sang with Whiteman's orchestra from 1929 into the early 1930s. Her debut on his Old Gold radio program, a performance of "Moanin' Low" on August 6, 1929, drew an immediate response. Her first records were an uncredited vocal on a 1929 Eddie Lang Orchestra session ("What Kind o' Man Is You?", a Hoagy Carmichael song issued only in Britain) and "I Like to Do Things for You" with Frankie Trumbauer on May 8, 1930. With Whiteman she recorded "My Goodbye to You" on October 6, 1931, and "All of Me," which was a hit in 1932; she left the band that year over salary disagreements. She also recorded four sides for Brunswick with the Casa Loma Orchestra in 1931, and in 1933 more Brunswick sides with the Dorsey Brothers Orchestra behind her. On August 18, 1932, she first recorded Carmichael's "Rockin' Chair," the song that became her theme and gave her the nickname "The Rockin' Chair Lady." After leaving Whiteman she sang on the radio shows of George Jessel and Willard Robison.

In 1933 she married the xylophonist and bandleader Red Norvo, who had also played with Whiteman. As "Mr. and Mrs. Swing" they worked mostly in New York City. A 1934 all-star session with Benny Goodman's studio band included Coleman Hawkins, the guitarist Dick McDonough, and the drummer Gene Krupa, and in the summer of 1935 a house party at the Bailey-Norvo home, where Goodman and Teddy Wilson jammed, led to the Benny Goodman Trio. From 1936 to 1939 Norvo recorded for Brunswick with Bailey as his main vocalist, while she recorded for Vocalion under her own name, often with Norvo's band and on other dates with members of the Count Basie Orchestra. Eddie Sauter wrote many of the Norvo-band arrangements, including those for her. Her Vocalion singles of 1936 to 1939 sold steadily, with "Trust In Me" reaching No. 4 and "So Help Me" No. 2 on the charts, and two of her sides with Norvo, "Please Be Kind" and "Says My Heart," reached No. 1 on the Hit Parade in 1938. She was featured on Goodman's Camel Caravan radio program and sang on several of his Columbia recordings in 1939 and 1940; "Darn That Dream," arranged by Sauter, topped the chart for a week in March 1940.

She and Norvo divorced in 1942 and stayed friends, recording together on and off until 1945. Decca did not renew her contract in 1942, and she went on as a solo act in New York rooms such as the Café Society and the Blue Angel, hosted a CBS radio series from September 1944 to February 1945, and recorded for Majestic in 1946 and 1947, partly with the pianist Ellis Larkins. She had diabetes and was hospitalized in 1938, 1943 and 1949, and in 1949 she retired for a time to a farm she owned in Poughkeepsie, New York. Money was a constant worry, and Crosby bailed her out more than once. Her last major engagement was with Joe Marsala in Chicago in 1950. She passed away at St. Francis Hospital in Poughkeepsie on December 12, 1951, of heart failure, at the age of 44.

She was inducted into the Big Band and Jazz Hall of Fame in 1989, and in 1994 the U.S. Postal Service issued a 29-cent stamp in her honor, based on a William Gottlieb photograph. The New Grove Dictionary of Jazz called her the first white singer to master the jazz-flavored phrasing of her Black contemporaries, a label that overlooks her mother's Coeur d'Alene heritage; in 2012 the Coeur d'Alene Nation asked the Idaho legislature to recognize that heritage and supported her induction into the Jazz at Lincoln Center Hall of Fame.

Bailey had a small, light voice, a quick vibrato, clear diction, and relaxed, exact phrasing, and critics praised her intonation, her sense of time, and her ability to sound unhurried at any tempo. Her debt to Ethel Waters and Bessie Smith, whose records she played for Crosby, showed in a repertoire that ran from ballads and show songs to blues such as "St. Louis Blues" and "Down Hearted Blues" and the gospel-flavored "Shoutin' in That Amen Corner." Her work with small, chamber-sized groups is often judged her finest, and the arrangements of Eddie Sauter and Alec Wilder let her understated delivery sit inside the band rather than on top of it. Critics have long argued over whether she was a jazz singer or an excellent pop singer who swung; the reference works that cover her place her in jazz, and the swing-era players who recorded with her were among the best of their day. Writers have traced her influence to Ella Fitzgerald, Peggy Lee and Kay Starr, and the Jazz.com encyclopedia hears her successor in Billie Holiday and her wit and directness in Rosemary Clooney and Blossom Dearie. Anita O'Day named Bailey, with Holiday, as one of her models.