Scotland's largest council is to raise the minimum wage for staff to £7 an hour — more than 20 percent higher than the national rate.

Despite the credit crunch and rising unemployment, Labour-controlled Glasgow council has announced it will raise the wages of 700 workers by 75p an hour — taking them to £1.27 an hour higher than the national minimum wage set by the Labour government.

It is the first council in Scotland to introduce a so-called "living wage". The Greater London Authority operates a similar policy, paying its workers above the national minimum wage, which is £5.73 an hour.

Glasgow has also said it will give preference to contractors who offer the same rate to their workers, affecting up to 80,000 privately employed staff.

The initiative will mean the salaries of its lowest paid workers will increase from £12,200 a year to £13,340 a year.

There are 681 employees in the authority earning less than £7 an hour who will benefit.

But the move has provoked a backlash from business leaders and taxpayers' groups, who say it as a "ludicrous" example of public-sector profligacy while the rest of the country is struggling.

Council leader Steven Purcell insisted on Sunday that it was right to pay council staff a "living wage".

He said: "It is simply unacceptable that almost one in five of Glasgow's workers are paid less than £7 per hour and the Glasgow living wage has the potential to make a huge difference to thousands of families.

"The introduction of a living wage can also provide real benefits to employers in terms of staff morale, productivity and quality."

He said the lowest paid suffered worst in hard times and the move was "the right thing to do".

The move was welcomed by Labour deputy leader Johann Lamont, who said: "It's great to see Glasgow City Council use all the economic levers open to it to help people through these difficult times."

But Mr Purcell's stance was condemned as a "disgrace" by the Taxpayers' Alliance, which said that, unlike local authorities, private firms did not have large amounts of public money.

Tens of thousands of workers have been laid off across the country. Many more have been forced to accept pay cuts or had pay frozen.

Susie Squire, the group's campaign manager, said: "It’s causing even more of a wage apartheid between the public and private sectors. When many taxpayers are facing redundancy and pay cuts, this will be seen as a real kick in the teeth."

Mr Purcell's decision will also embarrass the Labour party, which has been resisting union calls to raise the national minimum wage.

The British Chambers of Commerce has been lobbying the government to maintain the minimum wage at its current level until the recession is over.

Iain McMillan, director of CBI Scotland, warned that Glasgow's move could lead to further job losses if firms overstretched themselves in trying to match its wage.