The Treasury would save over £2 billion a year if workers were paid the Living Wage because of higher income tax payments and lower spending on benefits, a new study has suggested.
The Resolution Foundation and IPPR think tanks said the suggested rate of £7.45 an hour and £8.55 in London would add around £6.5 billion to workers' earnings.
Paying the Living Wage in the public sector would increase costs, but the total saving to the Treasury would be over £2 billion, said the report.
The think tanks recommended all Whitehall departments and London boroughs should pay the Living Wage, which is higher than the £6.19 adult national minimum wage.
Around five million people are paid less than the Living Wage, including three million women, research has shown.
Kayte Lawton, of the IPPR, said: "At a time when typical wages have flatlined 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.
"As a first step, making sure that all council staff in London are paid at least the living wage wouldn't cost very much but would be an important symbol of political leadership.
"Councils in other parts of the country, like Glasgow and Newcastle, have shown that the living wage can be affordable even though the costs are higher."
Matthew Pennycook, 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."
TUC general secretary designate Frances O'Grady said: "This report shows that fairer wages and decent in-work benefits are both vital means to boost living standards for millions of workers in low-pay Britain.
"Becoming a living wage employer helps staff, improves a company's reputation, and in many sectors is easily affordable. In some cases introducing the living wage leads to overall wage bills rising by less than 1%."