The Fair Work Commission's decision on Tuesday to lift the minimum wage to $1004.90 a week followed the federal government's call for a "sustainable" real wage rise.
The decision came amid ongoing uncertainty around the Middle East conflict and how long the Strait of Hormuz would remain shut, keeping upwards pressure on inflation.
Headline inflation was 4.2 per cent in the year to April, according to Australian Bureau of Statistics figures, but the Reserve Bank has forecast inflation to rise to 4.8% by the end of June.
Fair Work Commission president Adam Hatcher said it was not practical or responsible to award a pay rise above five per cent needed to close the real wage gap that had opened up since the COVID-19 pandemic.
"However, we consider that we should at least ensure that modern award relied employees generally are not worse off in real terms than they were as at 1 July, 2025," he said.
The commission also made a structural adjustment to the lowest pay classifications to effectively raise the minimum wage relative to the rest of the system.
The decision fell in between the range of suggestions made by unions and business groups.
In its submission to the commission's review, the Australian Council of Trade Unions called for a six per cent increase, arguing workers were still behind in real terms following the post-COVID inflation spike.
But employer body Australian Industry Group called for a lower rise of 3.9%, arguing the union body's claim would stoke inflation.
While the federal government does not nominate an exact figure, Treasurer Jim Chalmers said workers deserved a decent real wage increase.
"We want to see it go up further today, and that's because we recognise that higher wages and lower taxes are the best way to help working people with the cost of living," he told ABC TV ahead of the decision.
The decision covers about one in five employees, but given they tend to be lower paid, it only amounts to 11.2 per cent of the national wages bill, according to commission estimates.
But economists say the decision influences pay rise claims in occupations across the economy, and therefore results in broader flow-on effects.
The pay rise will kick in from July 1.
