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The process for setting the annual minimum wage increase is "shrouded in mystery" and should be replaced by one that is "genuinely based on economics", a leading business group has claimed.

At present the national minimum wage is set by the Low Pay Commission (LPC), an independent public body which includes representatives of both employers and employees.

However the British Retail Consortium (BRC) claims that the current system fails to accurately reflect trends in economic indicators that are monitored in order to set the basic level of pay in the UK.

A report released by the organisation claims that the minimum wage has risen by 46 per cent since it was introduced in 1999, while overall productivity has risen by just 31 per cent over the period.

The study, conducted by researchers at Oxford University, also claims the national minimum wage has risen to such a level that it is now almost the only pay rate in some business sectors.

Around 75 per cent of staff in the wholesale and retail sector are now understood to be earning the national minimum wage, which currently stands at £5.35 an hour for workers aged over 22.

The rate is set to rise again on October 1st, to £5.52 an hour.

But the BRC claims that past increases in the national minimum wage have been "erratic" and have "outstripped" all economic indicators that the basic pay rate should be based upon.

The trade association claims that, as such, retailers face uncertainty and are therefore unable to create jobs or plan future investments. It is also claimed that employers are finding it increasingly difficult to use pay levels as an incentive to reward staff who perform well, because the majority of workers in the retail sector are now earning the minimum wage.

BRC members are now calling on the LPC to set the national minimum wage according to median earnings growth and productivity levels per person. They say this would take into account the impact of new regulations and determine how affordable it was for businesses to implement recommended increases in the basic rate of pay.

Commenting on the research BRC director general Kevin Hawkins said: "This report shows the minimum wage has shot up way above any measure of average wages or productivity.

"That cannot be afforded any longer. Retailers cannot repeatedly absorb substantial increases based on subjective ideas of ‘what feels right,'" he added.

But a TUC spokesperson said it would be "foolish to replace this successful partnership process with a mere mechanical index".

"The BRC has consistently predicted that every increase in the minimum wage will be a disaster for the retail sector. The truth is that employment in retailing has grown to record levels and, according to the latest report from the Office of National Statistics, the underlying growth in retail sales remains firm," the spokesman added.