The Fair Work Commission has recommended a 5.2 per cent pay rise for more than 2.6 million Australians on award and minimum wages, equating to an extra $40 a week.
The national minimum wage will now sit at $812.60 per week, or $21.38 per hour.
The Fair Work Commission unveiled its decision on Wednesday, as inflationary pressures and the increasing cost of living continues to strain household budgets.
The decision was based on key differences in economic indicators, FWC president Iain Ross said:
"The most significant changes since last year's review decision have been a sharp increase in the cost of living and the strengthening of the labour market," he said while handing down the decision online.
"At the aggregate level, labour market performance has been particularly strong.
"The unemployment rate has fallen to 3.9 per cent compared to 5.5 per cent in April 2021 at the time of the last review.
"The improvement in the labour market is forecast to continue in the period ahead.
"There has also been a sharp rise in the cost of living since last year's review."
Whilst Mr Ross said inflation is expected to peak at around six per cent by the end of the year, Reserve Bank of Australia governor Philip Lowe warned inflation could reach seven per cent by the end of this year, requiring further interest rates hikes to bring it under control. In his first appearance since last week's board meeting, when the cash rate was jacked up to 0.85 per cent, Dr Lowe said on national television on Tuesday night that decisive action was needed in the face of rising inflation.
"We'll do what's necessary to get inflation back to two to three per cent."
"I'm confident we can do that but it's going to take time."
He said it was not unreasonable to expect the cash rate to reach 2.5 per cent.
Whilst not referencing Dr Lowe's comments, Mr Ross said inflation was a driving factor on the wage increase:
"Inflation also erodes the real value of workers' wages and reduces their living standards.
"The lowest-paid are particularly vulnerable in the context of rising inflation.
"We have concluded that the changes in the economic context weigh in favour of an increase in the national minimum wage."
The changes come into effect from July 1, unless there are exceptional circumstances but the aviation, tourism and hospitality sectors will have their pay increases deferred to October 1.
Last year, the national minimum wage increased by 2.5 per cent to $772.60 a week, or $20.33 an hour.
The Albanese government had argued for a rise that ensured wages did not go backwards when compared to inflation, which sits at 5.1 per cent.
Unions pushed for a 5.5 per cent increase which they say will prevent a further real wage cut for a quarter of all workers.
The Australian Industry Group urged the commission to limit its increase to 2.5 per cent, arguing the union bid would "add substantially to the risks of entrenching inflation and greater increases in interest rates".
The wages decision comes after federal politicians, judges and senior public servants were granted a pay rise by 2.75 per cent from July 1 following a determination from the independent remuneration tribunal.
The Fair Work Commission has handed down its minimum wage decision for more than two million low-paid workers and delivered a pay boost of 5.2 per cent a year.
ACOSS Acting Chief Executive Officer, Edwina MacDonald said:
"ACOSS welcomes the Fair Work Commission's $40 increase to national minimum wage and 4.6 per cent increase to modern award minimum wages. This approach recognises the particular challenges that workers on low incomes are facing with high inflation, with the lowest paid workers receiving an increase on par with the 5.1% increase in the cost of living over the past year.
"Real wage rates have been stagnant for a decade now. They can and should be increased substantially, at least to compensate for inflation, without triggering a wage-price spiral or higher unemployment.
"Women make up more than half (55%) of the low-paid award-reliant workforce. A substantial increase in minimum wages would also be a step towards reducing the pay gap between men and women."