The minimum wage will be lifted $1.05 an hour from its $20.33 base from July 1, an increase of 5.2 per cent, to $21.38 an hour.
Workers on award rates will go up 4.6 per cent — a cut in real wages — with a minimum $40 weekly increase for workers on award rates below $869.60 per week.
The Fair Work Commission said its decision would affect more than 2.7 million workers, as well other other employees on enterprise agreements and other pay settings.
Prime Minister Anthony Albanese made the minimum wage rise a pillar of his election campaign when he advocated for a pay rise of at least 5.1 per cent, in line with inflation.
Mr Albanese said he "absolutely" welcomed Wednesday's decision.
"The truth is that many of those people who are on the minimum wage are the heroes that saw us through the pandemic," he said.
Employment Minister Tony Burke said people would "see in their bank accounts what the change of government means".
"For the first time in nearly a decade, we've had a government argue for a real wage increase, and now it will be delivered," Mr Burke said.
Some business groups argued against a pay rise, suggesting supply chain and cost pressures made it unsustainable.
Fair Work Commission president Iain Ross said the rising cost of living was putting too much pressure on low-paid workers to ignore.
"We are conscious that the low paid are particularly vulnerable in the context of rising inflation," Mr Ross said.
"If we were to accept the submissions of some of the employer bodies, and award no increase at all, then the real wage reduction would be even more severe."
Mr Ross said the current labour market was strong enough that the pay increase would not have a "significant adverse effect" on the economy.
Unions say good news for some, not for others
Sally McManus, head of the Australian Council of Trade Unions, said the FWC's decision was a victory for wage workers.
"This decision is one that is reasonable and it is fair," Ms McManus said.
"It means that for low paid workers, [they] will have a better ability to pay rent and pay for the groceries and to pay for energy bills as well."
Ms McManus said it was disappointing increases for some hospitality and aviation workers were delayed, saying the aviation industry had recovered well.
And she noted that, while Wednesday's decision gave certainty to the quarter of the workforce on minimum wage and award rates, other workers were waiting to see an improvement to their pay packets.
"All Australians should share in the recovery and share in the growth that they are producing at the moment, and they are not," she said.
Business warns pay rise will further stress sector
The Australian Chamber of Commerce, however, warns the decision will put businesses under more stress.
Andrew McKellar — the head of the peak representative group for business — said the FWC had landed at the very upper range of possible pay rises.
"This will add $7.9 billion in costs to the affected businesses over the year ahead, so that will be a very considerable burden that those businesses will either have to take to the bottom line or pass on to their customers," he says.
"If we are to remain competitive, then, clearly, this is not a decision that will help in those circumstances."
The Australian Retailers Association said the lift in pay "could tip some businesses over the edge", and that economic recovery was still uncertain.
"The scale of this increase from the Fair Work Commission could send some businesses to the brink," the group said in a statement.
Pay increases, but more pain coming
The newly elected Prime Minister has been under pressure to ease cost of living burdens, as inflation, rising interest rates and skyrocketing petrol and energy prices hit Australians' wallets.
The Reserve Bank is also expecting inflation will continue to rise to reach 7 per cent by Christmas, and is planning for several more interest rate hikes.
More pain is in store for Australians in September, when a temporary 22 cent cut to the fuel excise is set to end.
In an election night survey of 1,400 Australians, The Australia Institute found the vast majority of people across party lines backed an increase to the minimum wage that kept up with the cost of living.
Eighty-eight per cent of surveyed Labor voters and 79 per cent of surveyed Coalition voters backed the pay packet increase.
During the election, former prime minister Scott Morrison criticised Labor for promising to push for the pay rise, saying the government should not intervene in the independent work of the Fair Work Commission — though governments of both stripes have made formal recommendations in the past.
