Unions and the federal government have welcomed the decision to lift the wages of Australia’s lowest paid workers by a $1.20 an hour next month.

But businesses have slammed the Fair Work Commission’s decision to lift the minimum wage by 5.75 per cent from July 1.

The FWC’s 2023 boost to minimum wages, announced on Friday, takes the hourly rate for thousands of Australian workers from $21.38 to $22.60.

The commission also lifted minimum award wages by 5.75 per cent.

“The decision today is the best outcome that we have ever had for the workers from an annual wage review or from its predecessors,” Employment Minister Tony Burke said.

“It has only been possible because of the actions of the government but yes, there are still more changes that we need to make.”

Mr Burke said that Friday’s decision and last year’s 5.2 per cent minimum wage rise meant the lowest paid workers were now earning nearly $3 an hour more than two years ago.

“This will make a huge difference,” he said. “[But] the situation for these individuals remains very tough. The government does not pretend otherwise.”

More than one in five Australian workers are paid minimum award rates.

Only 0.7 per cent earn the national minimum wage, which is the lowest rate. They will get a pay boost of 8.65 per cent because the FWC said it would end the alignment between the national minimum wage rate and the C14 classification wage rate in modern awards.

The national minimum wage will instead be re-aligned with the slightly higher C13 classification wage rate in modern awards.

The decision means, whoever, that millions of workers will still take a real wage cut, with inflation running at 6.8 per cent in the 12 months to April.

Despite that, ACTU secretary Sally McManus said the rise would make an “incredible difference” to low paid workers.

“This is an absolutely essential increase for all of the people in Australia who are struggling so hard at the moment just to survive, to pay their rent, to pay their groceries, to pay all of the basics,” she said.

“They are the people who actually keep the economy going in every way.”

The 5.75 per cent decision was well short of the 7 per cent sought by unions. But Ms McManus said it was “a hell of a lot more” than what employers had argued for.

The nation’s largest business network, the Australian Chamber of Commerce and Industry, had asked for a “cautious and calibrated” wage increase of 4 per cent.

After the FWC’s announcement, it said the decision would slug small and family business with a $12.6 billion wages bill.

“Today’s decision will come as a hammer blow for the 260,000 small and family-owned businesses who pay minimum and award wages,” chief executive Andrew McKellar said.

“The commission has disregarded the message it conveys to the wider labour market and the influence it holds over entrenching high inflation as the Australian economy faces a worsening outlook in the years ahead.”

Australian Retailers Association chief executive Paul Zahra said the size of the pay rise would be difficult for some retailers.

“Many retailers are under enormous financial pressure, with rising operating costs across the board. Supply chain costs have increased, utilities have increased, rent has increased, materials have increased and now labour will increase substantially,” he said.

“We fear the scale of this increase will tip some businesses over the edge – especially smaller retailers who are on very slim profit margins or in some cases in negative cashflow territory.”

However, FWC president Adam Hatcher said the commission handed down its decision under a “very unusual” set of challenges, including falling wages and high inflation.

“A further challenge is an expected sharp slowdown in economic growth over the next year,” he added.

He said the commission had considered the effect of the high rate of inflation on the ability of low-paid workers to meet basic financial needs.

The commission also factored in the upcoming boost to the superannuation guarantee from 10.5 per cent to 11 per cent, as well as the impact of a weakening jobs market on casual employees and relevant industries.

“We have also had regard to the need to avoid entrenching high inflation expectations by taking a perceived wage indexation approach, and the recent weak performance in productivity growth,” he said.

Mr Hatcher said the 5.75 per cent lift in award rates of pay would not trigger a wage price spiral as these workers constituted a limited proportion of the national wage bill.

Similarly, he said the boost to the minimum wage would “not have any discernible macro-economic effects”.

-with AAP