There is no room for complacency with respect to low pay. Although the Conservatives now endorse the principle of a minimum wage there is nothing to stop them freezing it at today’s levels. In the United States the federal rate stood at $5.15 for a decade until the Democrats captured Congress in 2006. We need to supplement the Low Pay Commission’s annual independent review with legislation that mandates annual indexation.

Which index to choose? The most common basis for up-rating is either inflation or average earnings.  Indexing to average earnings makes sense if the aim is to keep low paid workers in touch with the mainstream. But why settle for that? With so much public unrest over top rates of pay, why not set top earnings as the benchmark and turn the Minimum Wage into a permanent mechanism for capping earnings inequality?

This is not a radical proposal by the standards of the last decade. The minimum wage has been raised by an average of three and a half per cent each year, after inflation. That’s considerably more than increases in 90th percentile earnings, which in turn have been rising by more than average earnings. Only the post-tax incomes of the richest one thousandth of the population have been rising faster, at four percent after inflation. But it is a radical policy because it is permanent.  A law linking low pay to high pay would draw a line in the sand on earnings inequality: ‘thus far and no further’.

What about recession? Won’t this mean that the lowest paid are priced out of work? No, because it is during recessions that top pay stalls and inequality subsides. Indeed the new system could use times of crisis to close the earnings gap for good. In hard times low pay would rise by more than top pay if the minimum wage was linked to whichever was highest of a number of indices – say inflation, average earnings, 90th percentile earnings or even 99th percentile after tax income. Would this cost jobs? Hopefully not, as a study for the Low Pay Commission showed that the lowest paying sectors were relatively unscathed by the last recession. But the alternative is that the lowest paid in society see their incomes fall in real terms; refusing to up-rate to compensate for higher living costs is robbing Peter to pay Paul.

Andy Harrop is a Fabian Society member. He is head of policy at Age Concern England and was a Labour Party Candidate at the 2005 General Election.  He is writing in a personal capacity.