An urgent investigation has been launched into government plans to double the number of prisoners being paid to work while still behind bars.

Ken Clarke, the Justice Secretary, has told officials he wants to see nearly 20,000 convicts – twice the number of people currently employed by Starbucks in the UK – carrying out regular work in prison within 10 years.

But the plans have caused alarm among trade unions, who fear that a large increase in prison labour could adversely affect the job market in surrounding areas. They are now leading an investigation into the policy.

The Department of Justice has rebranded the old Prison Industries Unit as a new body called One3one Solutions and wants to increase prison revenues to £130m a year by 2021. One3one, which is named after the number of prisons in the UK estate, is offering interested companies the chance of "utilising a workforce of motivated prisoners" who, it claims, are looking to "build outstanding business relationships with you".

Prisoners are not paid the minimum wage, and labour contracts seen by the investigative website Exaro News show companies are typically paying prisons the equivalent of around £2 an hour for prisoners' labour.

Most convicts are paid much less, with the prisons taking a variable amount of their salary. At this wage level, the unions say, companies may choose to outsource jobs to prisons which might otherwise go to the law-abiding unemployed. There are also concerns that as the numbers employed in prisons increase, the emphasis will be less on training and development and more on using "cheap labour" to subsidise the prison estate. The TUC has launched an urgent study into the effects that an increase in prison labour is likely to have and is conducting research to see if there is evidence of jobs being "transferred" to prisons.

The move comes as an investigation by Exaro found a growing number of companies doing business in prisons. Among them were Speedy Hire, the tool-hire company, which reduced its workforce by 800 and closed 75 depots in 2010. It has since increased the size of its prison contract – to service the machines it hires out – by around 10 per cent, paying Erlestoke, Garth and Pentonville prisons £114,012 for the services of almost 100 prisoners during the 2010-11 financial year.

Speedy Hire told The Independent it was wrong to suggest that the purpose of the rehabilitation programme has been to enable it to reduce its costs during the recession. It added that its repair and maintenance workshops had increased their number of employees.

Calpac, a food packaging company, increased its contract with Kirkham prison from £34,321 in 2010 to £154,267. The company payroll showed that the highest-paid job is office manager – £40 for a 40-hour week. A "manual packing operative" was paid just 55p an hour. The payroll shows that many of the prisoners work overtime, taking them up to 60 hours a week.

Mike Perry, a director of Calpac, is quoted by One3one saying: "The costs of setting up a business within a prison are considerably lower." Caroline Onwuna, another of the company's directors, told Exaro: "If I moved my business on to the outside, I would be using machines not people."

Steve Gillan, general secretary of the Prison Officers Association, said allowing companies to pay so little was both "exploitative" of prisoners and risked damaging the wider economy. "We have concerns about simply using prisoners as 'cheap labour' for companies to cut their costs," he said. "Many prison are based in parts of the country which are very deprived and there is a real risk that companies will choose to go for the cheapest option and outsource work to prison."

Privately, sources at the Ministry of Justice admitted there was a risk such an ambitious target could backfire. But with the squeeze on prison budgets there is huge pressure to "make prisons pay".

A Ministry of Justice spokesperson said: "We want prisons to be places of productive work and industry where prisoners use their time constructively.

"We are clear that we must not unfairly substitute jobs in the community for work in prison."

Case study: Prisoners' families are silent victims of poor work pay

Mark Johnson, a former prisoner, believes education and treatment is more important than work behind bars. He is the founder of User Voice, a charity working to reduce re-offending ( www.uservoice.org)

In 1988 I was in prison and being paid £6.20 a week to work in the

kitchen. That was the best money in the prison. Other jobs I had included screwing lightbulbs together and sewing mail bags. For those I was paid about £3.50 a week.

That was the 1990s and wages in prisons have barely increased since then. When you consider that phone calls in prison cost up to five times more than the national average it puts it into perspective.

If prisoners are employed in prison then they need to be paid minimum wages. Prisoners' families are the silent victims in all of this – when someone goes to prison their whole family goes with them. But wages are only part of the problem.

The real issue is that it's all about employment in prison rather than employability. Sending prisoners to work in sweatshops might quench the public appetite for justice, but it's only a short-term fix.