Employers who can afford to pay more than the minimum wage should do so, suggests report

The Low Pay Commission called for an overhaul of the national minimum wage (Getty Images)

Employers who can afford to pay more than the national minimum wage would come under pressure to do so under a plan to lift one million people out of “poverty pay” published on Thursday.

The architect of the minimum wage introduced in 1999 has called for the Low Pay Commission (LPC), which recommends the pay floor each year, to be beefed up into a powerful watchdog. It would investigate which sectors of the economy, such as financial services, could pay more than the minimum rate without threatening jobs. It would then publicly urge such companies to raise wage levels – but they would not be forced to by law.

Labour and the Liberal Democrats are said to be interested in the idea of enhancing the commission’s role after next year’s general election. The Conservatives have warmed to the minimum wage after opposing its introduction, with George Osborne recently floating the idea of a £7-an-hour floor. Yesterday the Government confirmed that the minimum wage would rise by three per cent to £6.50 an hour on 1 October, after the commission proposed the first inflation-plus increase since 2008.

Professor George Bain, the commission’s first chairman, said after heading a nine-month inquiry that the minimum wage is now “narrowly focused, short-sighted in the way it is set and passive in what it expects of employers.” He added: “This caution was important when we introduced a new policy into a hostile world. But today it has become a weakness, limiting what the minimum wage can achieve.”

His inquiry, for the Resolution Foundation think tank, called for a culture of paying workers “not a penny more” than the legal minimum to be tackled. “The minimum wage has become the going rate in some sectors, with employers often feeling no pressure to pay more,” said the report. “The commission has neither the power nor the responsibility to incentivise employers to go further, even when they could afford to do so… There is evidence that large parts of the UK economy could pay more.”

About 1.2 million workers are paid the minimum wage and a further 1.4 million earn within 50p more than this level. Some 5 million UK workers meet the official OECD definition of low pay – below two thirds of the median full-time hourly wage, currently £7.71 an hour. The Bain report proposed setting a medium term goal for the minimum wage of 60 per cent of median earnings, to lift one million out of low pay.

It suggested the commission propose the minimum rate for two years ahead to help employers plan and called for a higher minimum wage in London. But it rejected calls for a different pay floor in other regions and to raise the minimum wage to the higher “living wage,” currently £8.80 an hour in London and £7.65 outside the capital, which some employers pay voluntarily.

Gavin Kelly, the foundation’s chief executive, said the proposals maintained the flexibility of the current approach but added more “ambition”. He said the minimum wage needed to be “turbo-charged”, by ensuring a significant rise in the medium term and giving the commission more power to bare down on low pay.