Average pay rises have outstripped CPI inflation for the first time in four years, sparking a fierce debate on whether workers are benefiting from the economic recovery.
Government ministers lined up to hail new figures showing that pay including bonuses was 1.7% higher in the year to February, compared to the latest CPI inflation rate of 1.6%.
The coalition said the news, coupled with another fall in unemployment and a record number of people in work, showed that its policies were laying the foundations for a stronger economy and that "Britain was working again."
But unions said workers were still facing a huge squeeze in living standards, and pointed out that when bonuses were excluded, average earnings only rose by 1.4%, still below inflation.
Millions of health and local government workers are gearing up for possible strikes in protest at pay increases of 1% or less, threatening a massive conflict with the Government in the coming months.
The Office for National Statistics said it was the first time since the spring of 2010 that CPI inflation has not exceeded the increase in pay, although the figure for public sector workers was 0.9%, compared with 2% in private firms.
It was also revealed that unemployment fell by 77,000 in the quarter to February to 2.24 million, a jobless rate of 6.9%, the lowest for five years, while the numbers in work has reached a record 30.3 million.
The claimant count fell by 30,400 in March to 1.14 million, the 17th consecutive monthly reduction, and s elf-employment increased by 146,000 to 4.5 million, the highest since records began in 1992. Long-term and youth unemployment have both fallen.
There are 1.42 million people working part-time because they cannot find full-time work, a fall of 17,000 over the quarter, but 10,000 higher than a year ago.
Minister for Employment Esther McVey said: "More young people are in work, more women are in work, wages are going up, and more and more businesses are hiring - and it's a credit to them that Britain is working again.
"But there is still more to do - which is why I'd go even further and call on more employers to work with us to tap into the talent pool the UK offers."
Chief Secretary to the Treasury Danny Alexander said: "These figures are some of the strongest evidence yet that we are embedding the recovery. We have record numbers in work and unemployment falling at the fastest rate in over a decade.
"With earnings now rising in line with prices and employment rising, these figures reinforce the fact that the only way to higher living standards is to take the difficult decisions needed to deliver our long-term economic plan.
"There is still a great deal more to do, but today's announcement is solid progress on building the stronger economy in a fairer society that Liberal Democrats entered coalition to deliver."
Shadow work and pensions secretary Rachel Reeves said: "While this fall in overall unemployment is welcome, today's figures show nearly 900,000 young people are unemployed and long-term youth unemployment has soared under David Cameron. The Government should introduce Labour's compulsory jobs guarantee to get young people into work.
"At long last, earnings are finally rising faster than CPI inflation when bonuses are included, but after four years when prices have risen faster than wages, there is a huge amount of lost ground to catch up.
"Working people are now over £1,600 a year worse off than when David Cameron came to office, most people are not feeling any recovery, and the link between the wealth of the nation and family finances remains broken."
Unite union general secretary Len McCluskey said: "There will be no sighs of relief from families struggling to get by in the face of the biggest squeeze in living standards since the Victorian era.
"With the retail price index (RPI) at 2.5% and wage growth at 1.4%, excluding bonuses, the squeeze continues, leaving ordinary people bewildered at the self-congratulatory tone of the Government that has presided over the growing shame of food-bank Britain."
David Kern, chief economist at the British Chambers of Commerce, said: "The labour market is continuing to strengthen, with employment up, unemployment down, and the number of inactive people falling. This demonstrates that the resilience and flexibility of the UK labour market is a source of strength for our economy. In addition, we are moving into an area where real wages are outpacing inflation, easing the squeeze on living standards."
TUC general secretary Frances O'Grady said: "With wages increasing by just 1.7%, barely enough to keep up with a prices measure that doesn't even include housing costs, the cost of living crisis is far from solved. This is not worth even half a cheer."
Neil Carberry, the CBI's director for employment and skills, said: " We've always said that as growth picks up more people will feel the benefits. Businesses are creating jobs across all sectors and real wages in the private sector are rising."
Dr Peter Carter, general secretary of the Royal College of Nursing, said: "While the private sector is rightly rewarding staff following several tough years, the public sector continues to punish its loyal and hard-working staff with more real-terms pay cuts.
"The health service has been kept afloat through a hugely chaotic reorganisation and soaring demand only thanks to the hard work of loyal staff, who have been told they do not deserve even a 1% pay uplift, which would still be below inflation."