There's nothing wrong with the Coalition mantra about "making work pay", except that for millions of British workers it doesn't.

This week the UK Government announced that the national minimum wage (NMW) was to go up to £6.31 an hour from October, a rise of 12p. "Joy for workers", read one headline. No, misery for workers. The "rise" is 1.9%, which amounts to a cut, as inflation currently stands at 3.2% and, according to the Institute for Fiscal Studies, is at least 4.3% for the poorest, who spend disproportionately on food and fuel.

The Coalition is never done with boasting about all the new jobs being created on its watch. The reality in Scotland, as clinically exposed by Holyrood's all-party Economy, Energy and Tourism Committee yesterday, is some 250,000 "underemployed" Scots scraping around for insecure, low-wage, dead-end jobs. It's the same all over the UK. A cleaner can rush between three different jobs and still have to rely on Wonga to clothe her kids.

The emotive rhetoric about "strivers and skivers" obscures the central truth that 60% of households which rely on benefits to make ends meet have at least one working adult. If their pay packets were a little fatter, it would save the Treasury billions in increased tax revenue and reduced benefits. And it would be the best way to kickstart the sluggish UK economy, as those on the breadline spend all they have. Yet there are those who would freeze the NMW out of existence, or simply abolish it.

The idea has its roots in Winston Churchill's wages councils, established in 1909 to protect the pay of workers in what were known as "the sweated trades". They could set a minimum rate in different industries. Margaret Thatcher weakened them during her onslaught on labour market regulation but they actually survived for 83 years until John Major's Government killed them off in 1992.

The argument against minimum wages is that because they raise pay levels, they must reduce employment, though little evidence was ever produced to support this view, which ignores both social justice and the benefits to the wider economy of increasing the spending power of the poorest. "Low pay is better than no pay," intone the opponents, who personally never have to choose between eating and heating.

By 1997 there were people working for £1 an hour. When Labour introduced the first NMW in 1998, the Tories voted against it, asserting that it would destroy at least a million jobs. It didn't. Employment rose, along with the spending of more than 20 million workers who benefited in its first decade. It heralded a big fall in wage inequality at the bottom end of the wage distribution, reversing the widening gap between median and low pay of the previous decade. And there was a ripple effect that lifted pay further up the income scale. In 2005 even David Cameron was forced to admit that the minimum wage had "turned out much better than many people expected, including the CBI". By 2009 it had gained public approval, with only around 4% saying it was set too high, compared with 72% who thought it was too low or about right.

Yet now the minimum wage is under threat again. The Government is rewriting the terms of the Low Pay Commission, the body that includes unions, employers and independents, who recommend upratings. Ominously, its new brief is to raise the wages of the lowest paid "without damaging employment or the economy". Old arguments die hard.

Low-income working families are already bearing the brunt of the cuts. Landman Economics calculates that £4 in every £5 of benefit cuts falls on them. All the tax and benefit changes since 2010 leave a couple with two children £1100 a year worse off. The "making work pay" agenda is undermined by the rate at which a clutch of passported benefits are withdrawn as wages rise. Universal Credit merely reduces the rate at which state support is tapered off, still leaving high marginal tax rates.

The elephant in the room is low pay. Rather than incentivising work by punishing the out-of-work poor (many of whom cannot work because of illness, disability or caring commitments), the Government should focus on raising the remuneration of the lowest paid. Surely, this is Labour's opportunity to reframe the welfare debate. Here are five suggestions:

l Guarantee to uprate the NMW at or above wage and/or price inflation. Alternatively, recognising that some sectors can afford to pay more than others, bring back wages councils. This could protect small firms with less scope to absorb wage pressures. The new TUC General-Secretary, Frances O'Grady, favours this idea.

l Reform the Low Pay Commission, giving it beefed-up powers to enforce the NMW. (There have been no prosecutions for three years.) This could help counter- grumbling about upper-class unpaid interns and immigrants undermining wages by working for pennies.

l Incentivise the adoption of the living wage, which is higher than the NMW and is defined as "sufficient to provide the essentials for a comfortable standard of living". It is currently £7.45 outside London and Glasgow was the first Scottish local authority to adopt it. A report from the Resolution Foundation recently suggested offering tax incentives to "living wage zones" to encourage public sector employers to spread the living wage to the private sector.

l Ed Miliband should develop his idea of offering companies tax rebates for paying decent wages. Currently, they are penalised through higher employer NI contributions.

l Oblige companies to state on their annual reports how many staff, including contractors, are paid below the living wage. Only then can we have a debate about the morality of a chief executive earning 200 times more than the women who empties his wastepaper basket.