Measures should be taken to cut the number of low-paid workers by a million to end the "national scandal" of poverty, according to a new report.
A year-long study by the Living Wage Commission recommended a series of "low cost" moves to tackle low pay, by building on the UK's economic recovery.
The commission, chaired by Archbishop of York John Sentamu, said increasing the pay of half a million public sector workers to the Living Wage could be more than met by higher tax revenues and reduced in-work benefits from a similar number of employees in private firms.
Professional service firms such as accountancy, banks and construction companies could boost the pay of 375,000 workers if they agreed to pay the Living Wage, currently set at £8.80 an hour in London and £7.65 elsewhere, compared to the national minimum wage of £6.31, said the report.
The commission, made up of business, union and voluntary sector leaders, said extending the Living Wage depended on the Government adopting a goal to increase the voluntary take up of the higher rate to at least a million more workers by 2020, otherwise families will continue to rely on food banks and "unsustainable debt".
Dr Sentamu said: "Working and still living in poverty is a national scandal. For the first time, the majority of people in poverty in the UK are now in working households.
"The campaign for a Living Wage has been a beacon of hope for the millions of workers on low wages struggling to make ends meet. If the Government now commits to making this hope a reality, we can take a major step towards ending the strain on all of our consciences. Low wages equals living in poverty."
Dr Adam Marshall, director of policy and external affairs at the British Chambers of Commerce, said: "The return to economic growth means that many employers are now looking again at increasing levels of pay for their employees after a tough period for business.
"Many thousands of companies already pay their employees a Living Wage, and many more have an aspiration to do so. As the recovery gathers pace, they should be supported and encouraged to make this happen without facing compulsion or regulation, which could lead to job losses and difficulties - particularly for younger people entering the labour market.
"Some businesses simply cannot afford to pay a Living Wage just yet - which is why the Commission rejected a compulsory Living Wage. The task now is to support as many employers as possible to make this transition, because paying the Living Wage can benefit employers as well as their staff."
Frances O'Grady, general secretary of the TUC, said: "The economy might be growing again but workers - especially the lowest-paid - are struggling to get by as wages continue to lag behind the cost of living. Increasing the number of workers on the Living Wage would help ensure that ordinary people can start to share in the fruits of the economic recovery.
"But as it stands many families simply cannot make ends meet. They find it hard enough pulling together the money to pay for everyday essentials. Trying to come up with extra cash to cover the cost of expensive childcare when the schools are closed for the summer holidays or to replace a broken fridge either means getting by without or going further into debt.
"We now have the perfect opportunity to transform the lives of millions of people in low-paid households. The Living Wage allows families to afford the goods and services that those in better paid jobs take for granted. It means more jobs will pay enough to cover everyday essentials, and that surely is not too much to ask."
Business Secretary Vince Cable said: "The Government supports businesses who voluntarily pay the Living Wage where it is affordable and doesn't cost jobs. Unlike the minimum wage, which is carefully set by the independent Low Pay Commission, the Living Wage does not take into account the effect rises in wages might have on the job opportunities of the lowest paid.
"To increase living standards, the Government has cut taxes making the average person £800 better off and taking 3.2 million people out of tax all together, and from this October, those on the national minimum wage will see the first real increase in their take home pay since the banking crash in 2008.
"The only real way of achieving sustainable increases in living standards is by focusing on economic growth, employment and reducing taxes for the low paid. This is exactly what we are doing."
Chuka Umunna, shadow business secretary, said: "Under David Cameron's government, we've seen a rising tide of insecurity as ministers have attacked and undermined people's rights at work. That's why the next Labour government will help more firms pay a living wage through Make Work Pay contracts and will repair the link between hard work and reward by restoring the value of the minimum wage, raising its ambition through a new five-year target, and supporting the high-skilled, better-paid jobs we need to see."
Len McCluskey, Unite general secretary said: "The Government cannot dismiss the work of Living Wage Commission or continue in its denial of the growing scandal of in-work poverty.
"The economic growth that George Osborne heralds is passing people's pay packets by and filling the wallets of the wealthy.
"A decent wage would give people dignity, cut the benefit bill and boost the economy, but for many families waiting until 2020 for a voluntary living wage simply isn't an option. Cameron and Osborne need to take action now and boost the minimum wage by £1.50 an hour to stem the tide of poverty pay."