Ministers faced fresh calls to back the introduction of the living wage across the country as a new study concluded that the move would result in an annual windfall of more than £2bn for the Treasury.
It argued that the step would yet extra tax revenues, cut benefit bills and boost the nation’s productivity.
The living wage is calculated as the lowest hourly rate to ensure a basic but acceptable standard of living and is currently set at £8.55 in London and at £7.45 outside the capital.
It is significantly higher than the national minimum wage, which is £6.19 for workers aged 21 and above.
Five million people, including three million women, are paid below the living wage and one in eight households contain at least one adult earning below that level
Ed Miliband, the Labour leader, and Boris Johnson, the Mayor of London, have backed the introduction of the living wage, while several Whitehall departments are also considering the move.
A joint report by the Resolution Foundation and the IPPR think tanks suggests its introduction would add £6.5bn to the pay packets of the lowest earners.
About £3.6bn would return to the Treasury in the form of higher income tax and national insurance payments, as well as lower spending on benefits and tax credits.
The department would have to pay an extra £1.3 on public sector workers, leaving it some £2.3bn better off as a result.
Supporters of the move argue that paying a living wage is affordable for big companies involved in banking, construction and computing, claiming that it would add less than one per cent to their salary costs. But they acknowledge that it could be more challenging for hospitality and retail sectors.
The report recommends that, as a start, all Government departments and London boroughs should pay their staff at least the living wage by April 2015.
Kayte Lawton, a senior research fellow at the IPPR, said: “At a time when typical wages have flat-lined but prices have continued rising, concerted action to drive up levels of pay for low earners is an essential component in the improvement of living standards.”
Matthew Pennycook, a senior analyst at the Resolution Foundation, said: “There are significant overall public savings to be made from paying a living wage, on top of the beneficial effects it would have on reducing working poverty. Public-sector employers are well-placed to expand the living wage and to set an example which the private sector can follow.”