The new economics foundation think-tank (nef) said its study showed that one in four local authority employees were on low wages.
Outsourcing of work from the public sector to private firms was driving down pay, said the report.
Part-time workers and women employees were disproportionately affected by low pay, including dinner ladies, school patrol staff and those in health and social care, the study of official statistics found.
Pay freezes in recent years, coupled with the rising cost of living, means that public sector workers are on average £2,000 worse off than in 2010, while part-time hourly earnings are worth the same as a decade ago, said nef.
The research showed that 500,000 low-wage workers are now employed by public service outsourcing companies.
"As squeezed local authorities award contracts to the cheapest providers, these workers are often even worse off than their counterparts employed directly by the public sector. A care worker earns only £6.44 to £7.38 per hour in the private sector compared to £9 to £11 in the public sector," said the report.
"Up to now, it was assumed low pay was confined to the margins of the public sector. But take into account the 500,000 low-wage workers employed by outsourced service providers and you can see the problem runs a lot deeper than that.
"As local authorities struggle to cut costs, they're leading a race to bottom - commissioning providers that pay workers less than they need to live on."
Karen Jennings, assistant general secretary of Unison, said: " The stereotype of overpaid public sector workers is not only damaging, but completely backward.
"Wages are being benchmarked against those in the worst parts of the private sector, rather than the other way round.
"Historically, the public sector was a key driver of progressive employment practice.
"It led the way on gender equality in the workplace and was the first to introduce pay resolutions and collective bargaining.
"Instead of bowing down to harmful criticism, the public sector needs to start proving that society benefits from decent wages."