The proposal, which will be one of the most controversial issues to be debated at the party's conference in Brighton next month, is based on the United States' experience in setting a low but statutory hourly minimum rate.
Lady Williams's plan, which will be published this week as one of two options for improving low pay, has been in gestation since at least the beginning of the year. But it has become caught up in the debate within the party over how much 'clear water' on policy the Liberal Democrats should put between themselves and Labour.
The party is likely to approve one of the two proposals for giving the state a role in determining minimum pay levels, which will be published by the Employment Policy Working Group this week. The group, chaired by Lady Williams, is roughly divided between them.
Under the alternative plan, which is favoured by Alex Carlile, the party's employment spokesman, by Paddy Ashdown, the party's leader, and by most of the Parliamentary party, an arbitration body would be given the power to set minimum rates for a particular industry if and when it thought these desirable. Such rates, if approved by Parliament, would then be legally binding but would probably vary according to age and region.
The arbitration body, which might be an offshoot of Acas or a new free-standing institution, would also have the power to institute its own inquiries or to act after complaints by groups of workers.
Lady Williams, who lives part of the time in the US and has extensive knowledge of American economic issues, has argued strongly within the group that, providing it sets a sufficiently low level, a national minimum wage could help to relieve poverty without any loss of jobs.
She has also contended that it is different in character from the national minimum wage policy which Labour will be under pressure from the unions to deliver.
The opposing camp believes the alternative proposal would be more flexible and would curb exploitation without limiting the power of viable small businesses to expand because of excessive wage burdens. They also argue that the US measure has created a substantial inner- city 'black economy' with many disadvantaged young workers employed on illegally low wages.
A number of senior Liberal Democrats - while accepting that Lady Williams's plan is unconnected with Labour's policy - are worried that it could be portrayed as such while Mr Ashdown is trying to maintain a distinctive free market identity in the face of the threat posed by the Labour Party under Tony Blair's leadership.
The employment paper also proposes that employers should be paid up to pounds 150 a week to give jobs to the long- term unemployed. It also suggests that social security payments to those who have been unemployed for six months or more should be converted into vouchers payable to employers.
Companies would only be eligible for such payments if they were genuinely recruiting an unemployed person as an addition to their workforce and they would be required to provide training. But it points out that there is a potential increase in revenue - estimated at an average pounds 23 per week - to the Exchequer from bringing workers back into employment.
The paper also recommends a 2 per cent payroll levy on employers to finance a big increase in training.
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