By Polly Toynbee

What is fair pay? How jobs are rewarded may always be irrational - an unruly muddle of tradition and notional markets - but the unfairness of low pay in Britain defies any rational or moral justification. Income inequality is the worst in Europe, the minimum wage virtually the lowest. My book on low pay, Hard Work, is timed to pitch at the low pay commission: next month its new head, Adair Turner, will publish his first recommendation on the next minimum wage rise.

The government has kept the minimum wage exceedingly low, at £4.20 an hour. It acts as little more than a backstop against the grossest exploitation. In real terms it is lower than the lowest rate set by any wages council before they were abolished by Mrs Thatcher. It is far less than John Smith's promise of half male median earnings, which would now pay £5.38 an hour. It is not even earnings-linked to guarantee it never falls back. Fairer pay is not part of the plan for achieving Labour's astonishing pledge to abolish child poverty, though without far more radical redistribution in pay as well as tax and benefits, it is unclear how it can be done. Since poverty is a relative measure, reducing inequality is a mathematical necessity.

Plotting on a graph all EU countries' levels of inequality and social security rates shows how countries with similar economies make very different decisions about wealth distribution. There is no iron economic rule that determines how people should be rewarded or wealth shared. Fairer countries (Scandinavia, Holland) tend to do better than the unfairest - Britain. The graph shows that equality is not a matter of ineluctable economics but of long-term politics: decades of social democracy have delivered fairer and more successful economies. It requires voters to want it and political leaders to offer it. Labour does want fairer shares; as Tony Blair said, Labour would have failed if it didn't achieve it. But they also say pay doesn't matter and tax credit subsidies are the best way to redistribute. As long as low pay is topped up by the taxpayer, wages are unimportant: the lower the better, if it creates jobs.

But pay matters a great deal. Ask FTSE 100 directors why their median pay is now £1.5m a year. They admit frankly that it is not the second yacht, but a matter of respect and status. What's true at the top is just as true at the bottom: pay signifies personal worth. It is of primary emotional and social importance. There is no justification for paying a care assistant, a nursery nurse or a hospital cleaner less than they can live on for work that society depends on. If you eat in a restaurant where the dishwashers cannot survive on their wages, you are paying too little for that meal: why should the state subsidise such meals by handing out credits to the dishwasher? The biggest single group of the poor are now in work and their only social problem is that they are not paid enough to live on.

The argument against raising the minimum wage is fear of job loss. At some level jobs would be lost, but no sensible economist can predict at what level or in which sectors. All dire predictions on introducing the minimum wage were wrong. There is little risk of jobs going abroad: low-paid jobs are virtually all in service work and old folk can't be cared for from India. These are mainly essential jobs and have already been squeezed and downsized to their bare bones.

If the government wants to raise the minimum to the maximum sustainable it could bring back wages councils, setting rates to fit not only different industries but different areas, with extra weighting for the south-east. They could fix a far higher "living wage" rate for all state employees and those jobs contracted out by the state. (This lifts the going rate without ordering every local hairdresser to pay the same.) The gap between men and women's wages actually grew last year, despite government pledges to end it: as women form 70% of the low paid, revaluing the work women do would make all the difference. Catering, caring or cleaning is only low paid because women traditionally do it. All this will cost money in taxes and in prices and no one suggests it can be done at once: it took Sweden decades of steady social democratic endeavour. But the huge task of abolishing child poverty can't be done by stealth.

So far tax credits are the government's chosen mechanism. They are a brilliant political device, silently shunting significant state funds to low-paid families - £40-£50 a week - without upsetting the CBI, while also making a large chunk of the social security budget disappear into the impenetrable maw of the Inland Revenue. Credits are so complicated that no one understands them, thus conveniently not alerting the rightwing press. Yet increasingly they warp the market, even if that is hard to measure. For example, if they were withdrawn, all low-paid workers would quit work at once and go on to social security, and employers would have to up their pay rates steeply to entice them back again. Tax credits make low pay possible and they subsidise bad employers. If the minimum wage rose and drove some marginal small companies out of business, their work would largely be taken up by bigger, better-run companies.

Topping up low pay for many will always be needed. But as the primary means of abolishing poverty, it is already starting to make pay packets look distinctly bizarre. A typical single mother now draws 65% of her money in credit, only 35% in earned pay, however valuable her work. If credits are to rise enough to abolish all poverty, the distortion of both the labour market and individual pay packets will become extreme.

Topping up pay has other serious defects, some of which the government tried to hide. Without notifying anyone, they sneaked out on a website on December 23 figures eagerly demanded for months - the take-up rate for the working family tax credits. These show that a third of entitled families were not claiming. Some 600,000 families were losing an average of £42 a week, resulting in a Treasury saving of £1.4 bn last year. (Since it can't be claimed in arrears, that cash should be used exclusively as a bonus for poor families: it could build and maintain many high-quality children's centres.) Experts reckon it extraordinary if any means-tested benefit ever reaches 80%.

Families depending on child tax credits will find their incomes fall off a cliff when their youngest reaches 18 (most children still cost after 18). Families depending on credits will never build up any pension entitlement, which comes with better pay, not better benefits. Wives have been forced to stay home, as their low-paid husbands' credits make it impossible for them to earn. That is bad news, since one in three marriages fail and women who have never worked have trouble supporting themselves later. Above all, the blunt fact is that it is unfair to pay people less than they are worth, less than they can live on. What they are worth is not set by the market - the market is set by the social security system.

But if none of these methods convince, then find others. Not even the right is comfortable with the idea that social progress is at an end and care assistants are destined to live on sub-survivable pay.

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