The national minimum wage is to increase by 19p an hour to £6.50 later this year, giving more than a million workers a pay rise.
The rate for 18 to 20-year-olds will go up by 10p to £5.13 an hour - a 2% increase - while for 16 and 17-year-olds the statutory rate will rise by 7p to £3.79, also 2%.
The minimum wage for apprentices will go up by 5p to £2.73 an hour, with all the new rates coming into force in October.
The Government said it had accepted recommendations from the low Pay Commission, including plans for bigger increases in future than in recent years.
Business Secretary Vince Cable said: "The recommendations I have accepted today mean that low-paid workers will enjoy the biggest cash increase in their take home pay since 2008. This will benefit over one million workers on national minimum wage and marks the start of a welcome new phase in minimum wage policy.
"The independent Low Pay Commission plays a crucial role in advising the Government about the minimum wage. This is why I asked them to look at how we could restore the real value of the national minimum wage as the economy recovers.
"The LPC's new forward guidance gives us a much better understanding of how an economic recovery can be translated into faster and significant increases in the national minimum wage for low paid workers, without costing jobs.
"The experts will continue to advise government on future wage rises to help the low paid, and in the meantime I urge businesses to consider how all their staff - not just those on the minimum wage - can enjoy the benefits of recovery."
Unison union general secretary Dave Prentis said: "Of course the rise will be welcomed, but at £6.50 an hour the new minimum wage will still be more than £1 less than the Living Wage needed to keep people out of poverty.
"Across the country people are struggling to make ends meet. The sooner we move to a Living Wage the better. The real winners today will again be payday loan sharks who prey on working people, unable to bridge the financial gap between what they earn and what their families need to survive.
"Even the Chancellor has stated support for a £7-an-hour minimum wage rate. The Government should have had the courage to step up and meet that target."
The Government said the increase was the first real value rise in the minimum wage in six years.
The LPC has predicted that the new rate will increase the number of jobs covered by the national minimum wage by more than a third, to 1.25 million.
A worker on the adult rate, working a 36-hour week, will receive an extra £355 a year from October.
John Allan, chairman of the Federation of Small Businesses, said: "The Government's decision not to go beyond the Low Pay Commission's recommendation is welcome.
"While the rise to £6.50 is slightly more than we would have hoped for, it is at least only 1% over inflation. Most small firms should be able to afford this.
"At this stage of the recovery, it is important that business momentum is maintained. If the rate were to increase by a significantly higher margin next year, it would place substantial pressure on small businesses operating on fine margins."
Unite union general secretary Len McCluskey said: "This timid rise in the minimum wage is proof that this Government cowers at the feet of big business in the midst of a cost-of-living crisis. The Government claims it is on the side of working people but companies are sitting on a cash mountain of £500 billion and they should be forced to share more of it with the lowest paid.
"Low-paid workers needed a real boost in pay to help lift them out of poverty. To make matters even worse George Osborne cruelly held out hope that the rate would rise to £7.
"The Government should have raised the national minimum wage by £1.50 to reverse the growth in inequality. Raising the national minimum wage to the Living Wage level alone would improve the Government's finances to the tune of £1.35 billion and would grow the economy by £3.15 billion."
Dr Adam Marshall, executive director of policy British Chambers of Commerce, said: "Businesses agree that the minimum wage must rise. In recent polling, 60% of chamber members recommended an increase in line with current inflation, and 14% favoured an above-inflation increase.
"Companies feel more confident now when it comes to the question of pay and, while the forthcoming increase is perhaps slightly more than they had hoped, it is a reasonable compromise.
"The challenge now for ministers is to work with business to raise productivity and skills in the workplace, which are the keys to higher wages for all in the future."
Low Pay Commission chairman David Norgrove said: " Provided the economy continues to improve we expect to recommend further progressive real increases in the minimum wage, so that 2014 will mark the start of a new phase - of bigger increases than in recent years - in the work of the Low Pay Commission.
"The labour market position of young people has yet to improve to match that of adults, although it now appears to have stabilised.
"We have recommended increases of 2% in their rates which should broadly protect their real value while increasing the relative attractiveness of young people to employers. We believe that youth rates should rise by more than adult rates when economic circumstances permit."
Martin Smith, the GMB union's national organiser, said: "Most people who are paid the minimum wage have to claim state benefits to keep body and soul together.
"We are arguing for wages and sufficient hours of work for people to live on. We are a long way away from living standards recovering to pre-recession levels.
"To promote a recovery we need employers to pay a living wage of £7.65 per hour and £8.80 per hour in London."