The UK's largest employer's lobby group has warned the government that continued sharp increases in the minimum wage would "damage" many businesses.
With the legal wage set to rise by 25 pence to £5.35 an hour on October 1st, the Confederation of British Industry (CBI) is calling for a modest rise in 2007 to avoid employers resorting to paying employees cash-in-hand, boosting the black economy.
In a report made to the government's low pay commission, the CBI warns that businesses will not be able to cope with the new minimum wage because of rising energy and employment regulation costs as well as lower growth forecasts for next year.
They highlight a 27 per cent increase in the minimum wage since 2002 compared with an 18 per cent increase in the average wage growth.
Retail, hospitality and food production have been the worst affected by the sharp rises in the minimum wage, leading to reducing staff hours and benefits and increasing the risk of job losses.
Susan Anderson, the CBI's director of HR policy, has warned that while the increase has improved living standards for many workers it is not sustainable.
She added: "Firms are already under great pressure from rising energy costs, lower-waged competition overseas, and an uncertain global economic outlook."
"Others are being undercut by a minority of unscrupulous employers who take workers on the black market to avoid paying the minimum wage."
But the TUC has hit back by claiming business can afford further wage increases.
Peters Sellers said the target for adults was a minimum of £6 an hour by 2008.
"The minimum wage hasn't had detrimental side effects, so I can't quite see why the CBI should be crying wolf at the moment," he told the BBC.