The biggest drop in living standards since the Victorian age is seeing low and middle earners suffering an unprecedented squeeze on their incomes as austerity measures continue to bite, with women and part-time workers disproportionately affected, research reveals today.

More than five million people are officially classified as low paid and an increasing number of public sector workers are struggling to make ends meet, according to the New Economics Foundation (NEF) think-tank.

It warned: “Workers on low and middle incomes are experiencing the biggest decline in their living standards since reliable records began in the mid-19th century.”

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The NEF has calculated that the public sector now employs one million low-wage workers – double the previous estimate – with health and social care staff, classroom assistants and council employees trapped on small earnings.

Sales assistants and retail workers make up the largest group of low-paid workers in the private sector, with large numbers also working as waiters, bar staff and cashiers.

The study blames the continuing drop in disposable incomes on pay freezes and below-inflation rises, leading to wages steadily lagging behind prices.

Separate research by the Joseph Rowntree Foundation concluded yesterday that for the first time the number of working families living in poverty exceeds those without anyone in work. The cost of living has moved up the political agenda in recent months with Labour claiming that the average person is £1,600 worse off than when the Coalition Government took power in May 2010.

Ministers counter that economic recovery is finally under way, with employment levels growing steadily, and that they have taken steps to lower the cost of petrol and energy and to raise the income tax threshold. However, one in four local authority employees is now on low pay, which is defined as less than 60 per cent of the average national income – equivalent to £7.47 an hour or £13,600 a year.

Helen Kersley, a senior economist at the think-tank, said: “Up to now it was assumed low pay was confined to the margins of the public sector. But take into account the 500,000 low-wage workers employed by outsourced service providers and you can see the problem runs a lot deeper than that.”

As squeezed local councils award contracts to the cheapest providers, these workers are often even worse off than their counterparts employed directly by the public sector. “A care worker earns only £6.44 to £7.38 per hour in the private sector compared to £9 to £11 in the public sector,” the report adds.

Karen Jennings, assistant general-secretary of Unison, which commissioned the report, said: “Wages are being benchmarked against those in the worst parts of the private sector... the public sector needs to start proving that society benefits from decent wages.”

Frances O’Grady, the TUC General Secretary, said: “The Chancellor has revelled in his attacks on the living standards of those who educate and care for our families.”

A spokesman for the Department for Work and Pensions said: “Our welfare reforms are designed to further increase work incentives and improve the lives of some of the poorest families in our communities, with the [new benefits system] universal credit making three million households better off.”