The cabinet decision follows earlier promises to investigate election fraud and official corruption, which have done little to persuade the tens of thousands occupying downtown's Tahrir Square to end their two-week long protest.
State TV also announced that the family of a detained Google Inc. marketing manager who helped organize the anti-Mubarak demonstrations, "has been notified that he will be released this evening."
Wael Ghonim was one of the most prominent youth organizers of the protests and was seized by security agents on Jan. 28.
Newly appointed Finance Minister Samir Radwan says some 6.5 billion Egyptian pounds ($960 million) will be allocated to cover the increases, which will take effect in April for the 6 million people on public pay rolls.
In the past, public sector employees have been a pillar of support for the regime, but in recent years as prices have soared, their salaries have stagnated in value forcing the government to periodically announce raises to quell dissatisfaction.
Following widespread labor unrest in public sector factories in 2008, Mubarak announced a 30 percent increase in prices that appeared to temporarily blunt public anger.
After the two weeks of instability that has pushed the Arab world's most populous nation to the edge of anarchy, the crisis now appears to be settling into kind of stalemate, with the government offering minor concessions that dodge the protesters' central demand: Mubarak's departure.
The regime appears confident in its ability for the moment to ride out the unprecedented storm of unrest, and maintain its grip on power, at least until September elections.
Egypt's state-run news agency reported that Mubarak ordered the country's parliament and its highest appellate court to reexamine lower-court rulings disqualifying hundreds of ruling party lawmakers for campaign and ballot irregularities, that were ignored by electoral officials — possibly paving the way for new elections.
The ruling National Democratic Party won more than 83 percent of the 518 seats in the 2010 parliamentary elections, which were widely condemned as being rigged.
Judicial officials also promised to start the questioning on Tuesday of three former ministers and a senior ruling party official accused of corruption charges after they were dismissed by Mubarak last week. The cabinet reshuffle was intended to placate protesters by removing some of the most hated officials in the government.
The official Middle East News Agency said former Tourism Minister Zuhair Geranah would be questioned Tuesday along with the former ministers of housing and trade.
MENA also reported that the country's top prosecutor had imposed a travel ban on former Interior Minister Habib al-Adli and froze his bank account.
Protesters on the square Monday said they remained unsatisfied.
"Our main objective is for Mubarak to step down," said student Mohammed Eid. "We don't accept any other concessions."
Cairo, however, seemed Monday morning to be closer to its normal weekday routine than on any day since the Jan. 25 start of the unrest.
Banks were open for limited hours along with many shops. The stock market announced it would reopen next Sunday, though schools were still shut for the mid-year holiday. Traffic was returning to ordinary levels in many places and the start of the nighttime curfew has been pushed an hour later to 8 p.m.
Rami Ghoneim, an unemployed internet activist, said the protesters were in no rush to leave so long as their central demand was not met. The more they stay, he said, the more concessions the regime would offer.
"It is like a wound, the more you press on it the more blood gushes out. We will press until we empty it," he said.