The prime minister's adviser on enterprise has told the cabinet that the economic downturn is an excellent time for new businesses to boost profits and grow because labour is cheap, the Observer can reveal.

Lord Young, a cabinet minister under the late Baroness Thatcher, who is the only aide with his own office in Downing Street, told ministers that the low wage levels in a recession made larger financial returns easier to achieve. His comments are contained in a report to be published this week, on which the cabinet was briefed last Tuesday.

Young, who has already been forced to resign from his position once before for downplaying the impact of the recession on people, writes: "The rise in the number of businesses in recent years shows that a recession can be an excellent time to start a business.

"Competitors who fall by the wayside enable well-run firms to expand and increase market share. Factors of production such as premises and labour can be cheaper and higher quality, meaning that return on investment can be greater."

A Downing Street spokesman said Young was merely stating a "factual point and nothing else". But the comments were described as "appalling and ill-timed" by union leaders, with job-market figures due out next week expected to show that the initial resilience of employment has faded while wages are being severely tightened.

UK employees' average hourly earnings have fallen by 8.5% since 2009 in real terms, adjusting for inflation, according to the Office for National Statistics (ONS).

In his report Young cites statistics from Barclays Bank showing a rise in the number of startup businesses after 2008, at the beginning of the economic crash, to trumpet the point that "a recession can be a good time to grow a business".

He further claims in the report, addressed to David Cameron, that while there has been a considerable reduction in public-sector employment over 2010-12 the private sector has expanded to more than make up a difference.

He writes that the UK's flexible labour markets make it one of the best environments for the creation of new firms, adding: "World-renowned firms such as GE, Microsoft and Disney all started during a recession."

However, official statistics show that any potential economic benefits of a recession for new businesses are not being shared across the country.

In London, 14.6% of active businesses in 2011 were new, significantly higher than in the regions, where much of the public sector job cuts have been made.

There was a 10.4% "death rate", which is the proportion of companies de-registering for VAT purposes in the year, according to the latest figures published by the ONS. In comparison, the north-west has a 10.5% new business birth rate but a 10.7% death rate.

Analysis of official jobs figures carried out for the Observer by the TUC also shows that 267,000 net new jobs have been created in London since the start of the recession in 2008; yet almost every other part of the country has fewer jobs now than before the crash.

Frances O'Grady, general secretary of the TUC, said: "The 2.5 million people still out of work will wonder what planet Lord Young is living on when he claims recessions bring economic gains.

"Not only is the government failing to deal with the living standards crisis, their advisers are revelling in the jobs and wage squeeze that is putting people's finances under strain."

Young was forced to quit just months into the government in 2010, after he was overwhelmed by condemnation of his claim that voters had never had it so good during the "so-called recession" due to low interest rates.

The former trade and industry secretary also dismissed the 100,000 job cuts expected each year in the public sector as being "within the margin of error" in the context of a workforce of 30 million. He added that complaints about spending cuts came from "people who think they have a right for the state to support them".

Young quit but was quietly reappointed 11 months later.

A Downing Street spokesman said: "Lord Young doesn't say a recession is a good time, he says it can be a good time to start a business, which is borne out by the statistics.

"The TUC is deliberately misrepresenting his report to suit their political agenda."