Speaking at the Centre for Local Economic Strategies' annual conference in Brighton today, Mr Prescott said that economic recovery alone would not deliver all the jobs Britain needed.
Mr Prescott said local authorities had tremendous potential to create jobs in the areas of community care, housing, health, education, maintenance, refuse disposal and street cleaning.
'There is a need for jobs to be done in local authorities and there are unemployed people available to do them. It's a simple case of the putting the elements together,' he said.
The Labour deputy leader called for a 'freeing up' of local authority finances, giving councils access to private funds and the right to issue public sector bonds to raise cash for special projects.
He also questioned the present government focus on economic efficiency in local authorities, putting forward a case for 'social productivity' - which maximised the use of human resources.
Hiring more people to carry out council services might run contrary to current government thinking, but it was better for society as a whole to have people employed in real work rather than wasting money on benefits, Mr Prescott said.
Mr Prescott said successful economies like Japan's recognised this principle. There private business was encouraged to be as efficient as possible, but Japan also had a large labour-intensive public sector that could not be justified on economic terms alone.