I want to deal with three things that affect poverty and income in my constituency: the minimum wage, the campaign for a living wage for Londoners and the poverty trap, which contributes to continuing high levels of worklessness, limits the aspirations and economic advancement of those on low wages in London and holds back reductions in child poverty and health inequalities. Finally, I want to suggest for consideration things that could be done to improve the lot of those living in my constituency on low incomes.

Despite the popular image of London as a roaring economic success—the London of city bonuses and champagne charlies that holds a place in the national imagination—there is also a London of real economic deprivation and hardship in which many struggle to survive. Those people are the workless and the hundreds of thousands of workers who service London's economic success: the cleaners, caterers and porters, to name a few. Their stories are shaming, and the facts are stark.

If we exclude pensioner households in 2003-04, one half of the people in income-deprived households had someone in employment in their homes; in other words, one half of the problem of poverty among non-pensioners is now about poverty in work. The UK is the fourth biggest economy in the world, and London is at the core of its wealth, yet 41 per cent. of the children in London are growing up in poverty. London is way ahead of the region with the second most deprivation. In the west Midlands, 32 per cent. of the children are affected by poverty.

Poverty costs us as a country and as a society, yet it was almost impossible to get official recognition of the existence of poverty among British citizens, particularly working British citizens, before this Government came to power. We have moved on since then with the introduction of the minimum wage and a system of tax credits, but we need to go further.

I pay tribute to the living wage unit, which has led some ground-breaking work at the Greater London authority. It has been aided by technical support from the family budget unit, which is a charity that undertakes comparative living standards and living costs analyses. It defines a low-cost but acceptable standard of living as one that achieves an adequate level of warmth and shelter, a healthy, palatable diet, social integration and avoidance of chronic stress for earners and their dependents. It uses a shopping basket technique to arrive at an across-the-board average for meeting the standard. The figure for Londoners after benefits and tax credits are taken into account is about £6.15 an hour.

The figure is an average. As many people fall below it, the unit increases it by 15 per cent. to £7.05 to come up with the difference between a poverty threshold wage and a living wage. To give a reality check, the families in such households do not smoke or drink, and do not have a car.

The family budget unit's original estimates were based on living costs in York. For London, costs have been calculated to be 31 per cent. higher than those in York for a couple—one working full-time and one working part-time—with two children, 35 per cent. higher for a working single parent, and 28 per cent. higher for a single person. Those are staggering figures.

It is in private rents that there is such a huge gulf between costs faced by Londoners, who cannot afford to buy and cannot get into social housing, and the rest of the country. Private rented, two-bedroom flats subject to housing benefits claims in 2004-05 averaged £165 a week in London, £77 in the north-west and £92 in the south-west, and that is what we need to focus on.

My constituents raise the issue with me constantly. Unless they live in the public sector and have a relatively low rent they find it so difficult to work.

We must acknowledge the difficulty in establishing national minimum levels of disposable income while these inequalities in housing costs exist; £7.05 is a living wage for a low-cost but acceptable standard of living, assuming that all benefits and credits are received, so how does the national minimum wage compare?

The answer is not very well; it has been catching up fast, but progress now appears to be at risk. Between September 2005 and October 2006, the minimum wage will have risen from £4.85 to £5.25, an increase of 8 per cent.

However, in the Low Pay Commission's report this year, Adair Turner writes that

"looking forward, the Commission will start with no presumption that further increases above average earnings are required".

That is not good news for Londoners.

Supported by the Mayor, London's living wage campaign has begun to deliver real successes and I pay tribute to the Mayor and to The East London Community Organisation—Telco—for their very effective strategies, which have been really successful. Telco and the Transport and General Workers Union campaigned to raise the hourly rate of cleaners working in banks who were earning as little as £4.20 an hour.

In 2004, Barclays bank increased the pay to contract cleaners to £6 an hour in its new headquarters in Canary Whalf, with 15 days' entitlement to sick pay and eight extra days' holiday; two months later, HSBC topped that. Following threatened demonstrations, the Deutsche bank in the City agreed to pay its cleaners a significant increase to a living wage level. Deutsche bank made a profit of £674 million in the last quarter. The increase in pay to its cleaners will cost it an estimated £350,000 a year, which clearly will not cause the bank any pain or any detectable dent in its profits.

It is time to change the culture; employers need to know that we as taxpayers are not prepared to subsidise bad employment practice, because that is effectively what we are doing. Despite the successes I have mentioned, and others, there is a long way to go; in London, one in seven employees receives less than the poverty wages of £6.15 an hour, and one in five less than the living wage of £7.05 an hour. London is Britain's low-wage capital as well as its snouts-in-the-trough capital.

The reason for this debate is to put some important questions on the table: is it possible to have differential minimum wage policies for different regions, thus recognising the massive differences in the cost of living within the United Kingdom? Would the London economy sustain differential wages? What would be the impact on the regional and national economies?

Sarah McCarthy Fry (Portsmouth North, Labour)

Given that there is already a London weighting allowance, does my hon. Friend agree that that analogy should apply to the minimum wage?

Lyn Brown (West Ham, Labour)

I thank my hon. Friend for that example, which is a logical extension of the issues that are clearly seen in the pay of civil servants and, indeed, Members of Parliament. There is a London weighting for those in inner-London constituencies which there is not in the minimum wage.

In my introduction I said that I wanted to reflect on the poverty trap, which will not be solved even by the living wage. Wage increases mean that some lose their tax credits, some their housing benefits, and some pay more tax and national insurance; all pay a marginal tax rate that would make a banker's eyes water. This is not an argument against the living wage—far from it—but an argument that seeks to highlight the other difficulties faced by communities who want to work.

I shall give an illustration of how the poverty trap works. The social regeneration unit of the London Borough of Newham—a fabulous, dedicated group of people— worked out the consequences of an increase from the national minimum wage to the living wage for my constituents—from £5.05 an hour to £7.05—for a couple with a three-year-old child who between them work a 50-hour week, and who pay an average private rent for the area and average council tax.

Let us imagine that the employers have an "A Christmas Carol" moment, and decide to move my constituents up from the minimum wage to that magic living wage figure of £7.05 an hour, an increase of 40 per cent. in gross earnings. What happens? They get £100 more in gross income; less tax credit; less housing benefit; less council tax benefit; more PAYE; more national insurance. They see £10.31 of their £100 increase. In other words, a marginal tax rate of 88.7 per cent.

I have lost count of the number of constituents who have raised this issue with me. I have constituents who have asked their employers to retract their wage increase because they were worse off than they were before they received it. I have constituents who work part-time who want to increase their hours to full time, who want to progress at work, to have a career and to access shared-ownership housing schemes but who simply cannot afford the additional rent they would have to find for their private rented accommodation to take that first step. They find themselves in the poverty trap, and cannot find their way out.

We must do something to ensure that the real gains of this Labour Government are not defeated by the poverty trap. In the case that I described the hourly rate of the individuals concerned would need to be doubled to ensure that their wages took them beyond its grasp. Doubling wages is unrealistic, so we have to find alternative solutions.

The poverty trap is too complex an issue to address in detail here, and there is no easy consensus. There are attractions in addressing housing benefit, for example, which is at the end of the food chain of the tax and benefit system, by increasing earnings disregards and reducing the rate of withdrawal of benefit as income rises. But I am aware that that moderates but also extends the problem up the income scale, and it is only tinkering. We need to be bold; frankly, we need to think outside the box.

I have four over-riding questions. First, is there a way to recognise the huge differential in living and housing costs through some form of differential minimum wage policy for the capital? We would need to assess the impact of such a policy on regional labour markets.

Secondly, can we, and should we, raise the threshold of income tax and national insurance to larger groups of workers? Should that be nationwide or regional? Should there be regional variations in tax codes, for example?

Thirdly, can we address some of the underlying factors that make the problem of poverty pay such a difficult nut to crack—for example, the continued existence of a deep poverty trap, and a shortage of housing that is affordable to those who want to work? Would the Government consider appointing a panel of experts to make one more effort to solve the poverty trap that is the key to working incentives?

Fourthly, should we make a commitment to continue to increase the national minimum wage at a rate that is significantly higher than inflation, as we have done in recent years, as a major contribution to the promise to reduce child poverty? Such a commitment needs to take account of the painless increases in the minimum wage in past years, and the real benefit of local spending to the economies of deprived areas.

It would be reasonable to ask what my proposals are on such an issue. I have argued that London has a particularly acute problem of low wages, which impacts gravely on child poverty and health inequalities, a cycle of deprivation that is reflected in the poverty indices. It is exacerbated by a cost of living far in excess of that of most of the rest of the country. Finding solutions to these problems is clearly not easy, otherwise we would have found them.

It is a complex subject. We need to review the inter-relationship of the benefits available to in-work families and the taxation paid by them, with a view to diminishing the deep poverty trap. We need also to build on discussions with the Department of Trade and Industry about socially irresponsible contracting; to create an equivalent to the Greater London authority's living wage unit in all regions of Britain; and to review the terms of reference of the Low Pay Commission.

Finally, we need to create regional living wage strategies that integrate with neighbourhood renewal and regeneration, particularly to ensure that workers in low-paid sectors in deprived areas benefit from Government investment. I accept that they are not glamorous or headline-grabbing proposals, but neither are they impractical.

One thing that the Government have done really well over the years is to change the terms of the debate and to shift the middle ground. I want the middle ground to be shifted again so that it will no longer be acceptable for the armies of low-paid workers to remain unrecognised at the cost of society's well-being.

A wage that achieves an adequate level of warmth and shelter, a healthy and palatable diet, social integration and the avoidance of chronic stress for earners and their dependents is an entirely reasonable policy step. It would build on the concept of the minimum wage, and it is an essential prerequisite for the objectives that would reduce inequality to which we on this side of the House are fiercely and strongly committed.