By Alex Stevenson
Downing Street has questioned moves by Labour to force contractors to pay their employees the living wage.
The claim begins a potential confrontation between Labour councils and the government over whether making public sector contracts conditional on the living wage being paid is legal.
Labour hopes to expand the idea, which sees all their employees receive an hourly rate set independently according to the basic rate of living in the UK, into the private sector by insisting it is used by all companies reliant on public sector contracts.
The opposition cited the example of Islington council's grounds maintenance contractor Enterprise, which fully absorbed the £150,000 cost of introducing the living wage to all its workers to keep its £20 million contract.
"There are already scores of British businesses who are saying that the living wage makes sense from them because it improves staff retention and reduces absence rates," Ed Miliband said at an event promoting Labour's use of the living wage today.
"We will learn from them and find ways to help other businesses become living wage employers."
Downing Street questioned whether Labour's approach was legal, however.
"Forcing companies to pay a particular wage would not necessarily be consistent with EU procurement laws," the prime minister's spokesman warned.
That follows a warning from the Department for Business, Innovation and Skills that the living wage "does not consider any potential adverse employment effects and – despite its name – is unlikely to be a well-targeted poverty measure".
Labour has pointed out that this clashes with David Cameron's comments on the living wage before the general election, when he described it as a "good and attractive idea".
Work and pensions secretary Iain Duncan Smith said his department paid the living wage and backed the idea, however.
He told BBC Radio 5 Live's Pienaar's Politics programme yesterday: "You can rest assured the government is very keen for us to make progress on this matter… I'm hopeful overall we'll make progress so that people on the lowest incomes meet that level.
"We are fully in discussion with those who have campaigned for it. We've got to be very careful this doesn't lead to people losing their jobs. That isn't something I want to happen."
No 10 said the Low Pay Commission had recently advised that the youth minimum wage should be kept at the same rate, citing the need to protect jobs.
"Requiring people to pay it would reduce the flexibility businesses have and could ultimately be bad for jobs," the prime minister's spokesperson warned.
London mayor Boris Johnson announced a significant increase in the living wage today, with the rate increasing by 25p to £8.55 in London and £7.45 outside the capital.
The announcement came as Miliband met with the heads of the growing number of Labour councils which have become living wage employer status.
In a rare show of cooperation, his brother David joined him to campaign for the scheme. Over the last 12 months Labour has increased the number of local authorities with living wage employer status from two to eight, while also adding Birmingham, Oxford and Preston.
Johnson said the new rate will be worth £4.5 million a year for lower-paid workers.
"Britain needs a government that will work with the best of British business to build greater prosperity and share it more fairly," Miliband said.
"That is what One Nation is about. The living wage is an important part of helping to make that happen. It is an idea whose time has come."