The national minimum wage will rise to £5.73 an hour in October, Prime Minister Gordon Brown has announced.
Rising food and energy bills have put pressure on household finances
It will rise by 3.8% from £5.52. For 18 to 21-year-olds the rate will be £4.77, up from £4.60, while 16 to 17-year-olds will get £3.53, up from £3.40.
The government said that one million people would benefit from the increase, two-thirds of whom would be women.
Mr Brown said that the minimum wage had gone up by 60% since the policy was introduced by the government in 1999.
The original level when the minimum wage was launched was £3.60 an hour. It was last increased in October 2007.
Business Secretary John Hutton said: "The national minimum wage remains one of the most important rights introduced by the Government in the last decade."
"Before it was introduced, some workers could expect to be paid as little as 35 pence an hour. Our legislation has ensured that can no longer happen.
"I am proud of the minimum wage. It makes a real difference to the lives of many of our lowest-paid workers and protects them from exploitation. It also creates a level playing field for business and boosts the economy."
The government also wants to crack down on those employers not paying the correct amount, with the maximum penalty increased to an unlimited fine.
The TUC says 150,000 workers are still not paid the minimum
In December, the TUC said it believed 150,000 workers were still being paid less than the statutory minimum.
Unions have long called for enforcement powers in this area to be strengthened.
More than £27m in unpaid wages has been recovered on behalf of 80,000 workers since 1999.
TUC general secretary Brendan Barber welcomed the policy, saying both workers and law-abiding employers would benefit from the system being as robust as possible.
He also welcomed the latest increase in the minimum wage.
"The Low Pay Commission (LPC) was right to withstand pressure from business warning of economic trouble ahead," he said.
"The truth is that employers will be able to absorb these sensible increases without too much difficulty."
John Cridland, deputy director general of the CBI, said the LPC had taken the correct approach in the past by not increasing the minimum wage by more than the growth in average earnings.
"At a time of considerable uncertainty for businesses and with economic growth already slowing, we welcome today's moderate approach," he said.
Tony Woodley, joint leader of Unite, wanted to see the rate increase to more than £6.
"This rise is well below current RPI inflation and projected pay increases, which both stand at 4.1%," he said.
"At a time when inequality is rising up the political agenda and business leaders are awarding themselves record pay rises, the lowest-paid workers continue to slip back. This cannot continue."
Unison general secretary Dave Prentis said: "There is no doubt that this increase will benefit thousands of working people.
"However, it falls short of its aim to protect the poor from the constant price rises in essentials like fuel, food and housing.
"A much more realistic figure would be a minimum wage of £6.75 an hour, which would lift many more families out of poverty and off means-tested benefits."