The government claims there are no plans to tear up the system of national bargaining under its proposals for local pay.
Cabinet Office minister Francis Maude said the proposals were “not about cutting anybody’s pay” or making further savings.
But Labour warned the plans would increase costly bureaucracy and exacerbate the divide between rich and poor areas of the country.
Chancellor George Osborne raised the prospect of local agreements in the public sector to reflect differing pay rates across the country in the Budget last March.
The independent pay review bodies, including the NHS Pay Review Body, are currently considering the case for the change.
However, there have been concerns about the plan across the coalition, particularly from Liberal Democrat MPs, and signs earlier this week that Downing Street was cooling on the idea.
Responding to a Commons debate on the issue called by Labour, Mr Maude said: “There is, we believe, a strong case for looking at introducing local market-facing pay and at how it can be done.”
But he insisted: “It is not about ending national pay bargaining. Pay can be made more responsive to local labour markets within a national bargaining framework.
“Any benefits from localising pay can be realised without any need to get rid of national pay bargaining.
“Secondly, it is not about making further savings. We will continue to operate within tightly constrained overall public pay remits. These are currently set at 1% a year.”
He added: “Our approach would be entirely not about making further savings but about creating greater flexibility within those pay remit constraints.”