The Adam Smith Institute, a group of right-leaning economists lobbying for free market conditions, is calling on chancellor Philip Hammond to roll back the government’s pledge to guarantee a higher basic wage for low-pay workers.

Mr Hammond will deliver his budget next month and has promised to help business struggling with controversial increases to business rates.

The Institute says increases in the minimum wage costs jobs because they encourage bosses to switch to automotive software that replaces human workers.

In a report, the group says it increases “unemployment and criminal behaviour, cuts the bottom few rungs off the employment ladder, increases consumer prices and hampers low skilled workers throughout their lives”.

It also says that the introduction of the National Living Wage (NLW) effectively took rate-setting powers away from the impartial Low Pay Commission, which controls the minimum wage, and handed it to politicians.

“The minimum wage for people over 25 years of age is no longer based on complex economic considerations, but hiked up for quick political wins which incur costs on the very workers the NLW claims to benefit,” the report states.

It also suggests employers are adapting the NLW in ways that harm the economy, such as reducing recruitment of unskilled labour, automating processes, outsourcing work abroad or raising prices.

About 5% of the UK workforce comes under minimum wage legislation, but the Institute said this would rise as low-pay rates increase from £7.60 this year to more than £9 in 2020.

Sam Bowman, executive director of the Adam Smith Institute and co-author of the report, said: “We need to do everything we can to raise the incomes of Britain’s worst off workers, but there is a huge danger that the National Living Wage will actually end up hurting them by reducing employment.

“There is an important difference between the National Minimum Wage and the Living Wage, in that the former is set by a panel of experts with a mandate to minimise the risk of job losses, but the Living Wage is set by politicians whose main interest is looking good on the ten o’clock news.

“That’s a recipe for disaster, and we believe that direct cash transfers like tax credits or a Negative Income Tax would be much less risky ways of helping people at the bottom than the National Living Wage.”

Earlier in February, the Trades Union Congress (TUC) called on ministers to prosecute employers that fail to pay the minimum wage. It said major high street chains such as Debenhams, Subway and the Co-op had all fallen foul of the legislation.

“This should be a wake-up call for employers who value their reputation. If you cheat your staff out of the minimum wage you will be named and shamed,” said TUC general secretary Frances O’Grady.

“But we also need to see prosecutions and higher fines for the most serious offenders, especially those who deliberately flout the law. Minimum wage dodgers must have nowhere to hide. We need to see strong unions in every workplace to stop these abuses from happening.”

Also this month, retailer Argos agreed to pay 37,000 workers £2.4 million after HM Revenue and Customs found it had breached the rules.