Tories could raise minimum wage in effort to dispel their image as the 'party of the rich'

Major U-turn by Conservatives who opposed Labour’s decision 15 years ago

The Conservatives may promise a significant increase in the national minimum wage as they try to dispel their image as the “party of the rich” and show that the benefits of economic recovery are being shared fairly.

David Cameron is being urged by key advisers to boost the minimum wage amid growing evidence that low paid workers have seen their living standards decline because it has failed to keep pace with rising prices in recent years. The move would be a major U-turn by the Conservatives, who opposed Labour’s decision to bring in the minimum wage 15 years ago, warning it could cost up to 2m jobs.

Policy Exchange, a think tank with close links to Mr Cameron, is to study how the £6.19 an hour minimum wage could be raised without forcing companies to shed jobs. One idea is to encourage firms to raise it by offering them lower national insurance payments in return.

The think tank will report later this year but it is likely that any pledge of a higher wages floor would be included in the Tory manifesto at the 2015 election. Supporters include Jo Johnson, the Tory MP who heads the Downing Street Policy Unit, and Oliver Letwin, the Tories’ policy chief.

The Treasury is nervous. “You cannot create higher wages out of thin air,” one insider said today. But two allies of George Osborne - Matthew Hancock, the Business Minister, and Neil O’Brien, a special adviser- are prepared to consider a rise in the minimum wage if it could be done without putting jobs at risk.

Ryan Shorthouse, director of the Bright Blue think tank of Tory modernisers, said: “It would be wise to soon commit to significant rises to the minimum wage, which could be varied by sector or region. Getting employers to do more to tackle the growing problem of low pay in the UK, especially as the state is limited in what it can do because of ongoing austerity, is eminently sensible".

With 2015 billed as a “living standards election,” all three main parties are now studying how to tackle low pay. Labour and the Liberal Democrats want to encourage the growth of the higher living wage paid voluntarily by about 250 employers, which is worth £7.45 an hour, or £8.55 an hour in London.

Gavin Kelly, chief executive of the Resolution Foundation which champions those on low and middle incomes, said: “It would be very welcome if all three parties had an open debate about how best to lift low pay and the role that the minimum wage could play in ensuring that the gains from any recovery reach those at the sharpest end of the jobs market”.

In a report published on Wednesday, the think tank said the economic downturn has pushed a further 1.4m workers below the living wage. It shows that 4.8m people (20 per cent of all employees) earn below the level --up from 3.4m (14 per cent) in 2009.

On Wednesday Labour will attack the Coalition’s record on living standards in a Commons debate. Rachel Reeves, the shadow Chief Treasury Secretary, will announce that Alan Buckle, deputy chairman of KPMG international, will review for Labour how government can help more employers pay staff a living wage. The Tories will hit back by claiming that the average person could be £1,996 worse off a year under Labour.