About 2000 of the lowest-paid public servants will move onto the 2018 living wage of at least $20.55 an hour, Minister of State Services Chris Hipkins has announced.

The new hourly rate – or $42,744 a year – will cost an estimated $7.23 million for a one-off adjustment by September 1.

The cost will be met by each government department from within their baseline funding.

Most of the workers who will benefit work in 13 government departments in jobs including clerical and administration, welfare, contact centre workers and assistant Customs officers.

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"This decision is about supporting fair pay and employment conditions for a decent standard of living for all New Zealanders," Hipkins said.

"This Government strongly believes that every worker should be in a situation where the pay they receive means they can at least make ends meet."

In subsequent years, the rate will be the subject of bargaining between employers and unions.

The public servants' union, the PSA, called it a big win for its members.

More than 1000 PSA members in the core public service were paid below the living wage, the union said.

"We welcome the central role that the Government is giving to collective bargaining and the PSA in ensuring the rates are maintained on an ongoing basis," national secretary Glenn Barclay said.

"We will work hard to ensure this is embedded in collective employment agreements so all public service employees can earn a living wage.

The E tū union welcomed the decision but said the living wage needed to be extended to contract workers in the core public service.

"During the election campaign, the Government said it would pay the living wage to these workers before the end of its first term and we are looking forward to them delivering on that," E tū organiser Yvette Taylor said.

"Contract workers are the lowest-paid people in the core public sector and if the Government is serious about reducing poverty and showing leadership, it needs to be paying them the living wage."