Prime Minister Anthony Albanese has welcomed the Fair Work Commission’s decision to raise the minimum wage by 5.2 per cent.

But business groups and economists have argued the increase will add to inflation and lead to faster interest rate hikes.

The FWC announced on Wednesday that the minimum wage would rise by 5.2 per cent to $21.38 an hour, while modern award minimum wages would rise by 4.6 per cent, or at least $40 a week.

The FWC’s decision will directly affect up to 2.7 million Australians on award and minimum wages and for most workers will come into effect on July 1.

Mr Albanese said the decision to award low-paid workers a decent pay rise was necessary as many had kept the country running during the pandemic.

“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.

“They deserve more than our thanks – they deserve a pay rise, and today they got it.”

Surging inflation a key factor

FWC president Ian Ross said the commission was awarding a higher increase than it did last year (2.5 per cent), because the cost of living was rising and “the low-paid are particularly vulnerable in the context of rising inflation”.

Mr Ross said the FWC had tried to strike a balance between protecting workers from real wage cuts and inadvertently adding to inflation, which the Reserve Bank estimates will hit 7 per cent by the end of the year.

“We have concluded that the changes in the economic context weigh in favour of an increase in the national minimum wage and in Modern Award minimum wages,” Mr Ross said, handing down the decision on Wednesday morning.

The commission’s president suggested the wage increase would have been even higher had it not for been for several “moderating factors”.

These included the half-a-percentage-point increase to the superannuation guarantee from July 1, the removal of the minimum income threshold below which employers are not required to pay super, and the cost-of-living support contained in the federal budget.

Reaction to the decision was mixed.

Tweet from @sallymcmanus

Unions and business groups disagree

Australian Council of Trade Unions president Sally McManus said the wage increases were the result of union campaigning and would make “a hell of a lot of difference for working people”.

“The union movement fought hard for this increase, standing up for the quarter of Australian workers who rely on this process for a pay rise,” she said in a statement.

“If it were not for unions, with employers pushing for big real wage cuts, Australian working people and their families would see no relief from cost-of-living pressures.”

But business groups took a different view, arguing that the wage hike would actually worsen cost-of-living pressures for families by pouring fuel on the inflationary fire and forcing the Reserve Bank to hike rates faster than it otherwise would have done.

“There is a major risk that the 5.2 per cent increase that has been awarded to the national minimum wage, with increases of between 4.6 per cent and 5.2 per cent to award rates, will fuel inflation and lead to even higher interest rates,” said AiGroup chief executive Innes Willox.

He said that would lead to “even more hardship for people with mortgages, personal loans or credit card debts, and add substantially to the risk of unemployment and underemployment – particularly for unskilled employees.”

Mr Willox welcomed the decision to delay until October 1 the increase to modern award wages in the aviation, tourism and hospitality sectors.

These industries successfully convinced the FWC that they had yet to fully recover from the pandemic and could therefore not afford sizeable wage increases in July.

But Mr Willox said the cost increase would nonetheless “be difficult to absorb for businesses that are already struggling to cope with big increases in material and energy costs, interest rate rises, supply chain disruptions and labour shortages.”

Budget measures criticised

Dr Steven Hamilton, an assistant professor of economics at George Washington University, also raised concerns about growing inflationary pressures.

“The combination of robust minimum and award wage increases and the significant additional fiscal stimulus due next month are strongly inflationary and will lead interest rates to rise faster than they otherwise would,” he said.

The federal budget in March included $16.4 billion in cost-of-living measures, including a temporary cut to the fuel excise, one-off $250 payments to income-support recipients, and a one-off $420 boost to the low-and-middle-income tax offset (LMITO).

The fuel excise cut will last until September, while the turbocharged LMITO will start flowing into bank accounts when households begin filling their tax returns next month.

Economists warned at the time that the cost-of-living measures contained in the previous government’s last budget would only add to inflation.

Labor supported the measures when the Coalition introduced them to Parliament.