"Such adverse effects will impact on those groups who are already marginalised in the labour market and on households vulnerable to poverty due to the loss of employment or hours," he said. "An increase of the magnitude they propose would also carry a substantial risk of reducing the employment opportunities for low-skilled workers, including many young persons looking for work.

Mr Ross said the increase would not create "undue" inflationary pressure and was "highly unlikely" to have a negative impact on employment.

"However, such an increase will mean an improvement in the real wages of those employees reliant on the national minimum wage and modern award minimum wages and will, absent any negative tax transfer effect, result in an improvement in their living standards," he said.

"Compared to the position at the time of last year's review, the economic indicators now point more unequivocally towards a healthy national economy and labour market.

"The circumstances are such that it is appropriate to provide a real wage increase to those employees who have their wages set by the national minimum wage or by a modern award."

Jonathan Madeley is a disability support worker who lives in the Blue Mountains with his wife and two young children. He is paid under the disability services award and said he had to work unsociable hours to make a living wage.

"The way things are at the moment, I have to work late afternoon, night shifts and weekends to make ends meet," he said. "I have a two-year-old and a four-year-old daughter and it takes me away from them when I really need to be there. So any wage rise at all, if I can work less unsociable hours, means a lot."

Mr Madeley said he was "very happy" with a 3.5 per cent rise.

“At the moment, it just means bills are going to be paid on time and hopefully just keeps up with cost of living increases," he said. “Obviously it isn’t life changing, but over time every little bit adds up. I’m happily surprised it was 3.5 per cent.”

'Pushing economy off course'

ACTU leader Sally McManus had urged the commission to increase the minimum wage by 7.2 per cent to $744.90 a week to stop low wage growth "pushing our economy off course".

She said the increase was a “step in the right direction”.

“This 3.5 per cent increase, which equates to $26.71 per week for a hospitality worker or $24.33 for a horticulture worker, will be a welcome reprieve for them but we will continue to fight for the restoration of a living wage that underpins a much fairer collective bargaining system,” Ms McManus said. "All Australian workers need a pay rise, but none more so than the 2.3 million people who are now award reliant.”

The ACTU claim was part of its campaign for a "living wage", which would see the minimum wage increased to 60 per cent of the median wage. It was the biggest claim unions have submitted to the Fair Work umpire.

Job security

The Australian Industry Group's submission was for a 1.8 per cent increase, below the March quarter inflation rate of 1.9 per cent. Ai Group chief executive Innes Willox had argued that an excessive increase would reduce the job security of low-paid workers and reduce employment opportunities for the unemployed and underemployed.

Mr Willox said the 3.5 per cent minimum wage increase had the potential to be a major disincentive to employment.

"It is out of step with wage movements across the economy, with inflation, and with the pressures that many businesses are under," he said. "Contrary to the suggestion by the commission, there remains a clear risk that these businesses will be less able to afford creating new jobs or to offering their existing employees additional hours."

Stifle growth: Retailers Association

Russell Zimmerman, executive director of the Australian Retailers Association said the wage increase would stifle retail growth, delay staff employment across the industry and potentially lead to job losses.

“Monthly retail sales growth is currently around 2 per cent, however we would like to see this growth increase to 4 per cent to ensure retailers can invest in their business and employ more staff,” he said. “Today’s minimum wage increase is well above inflation, putting the brakes on employment and innovation throughout the industry, which is detrimental for the retail sector.”

Australian Chamber chief executive James Pearson said while some people argued higher wages led to increased spending, many businesses were unable to open on weekends or for longer hours due to the cost, and many people could not get jobs or enough hours.

“Businesses which can’t pass on such significant rises to customers will have to cut hours, cut jobs or both," he said.

William Olson, who works in catering, commutes to Melbourne from Geelong every day for work, which costs him about $9 a day. He is not happy with what his union, United Voice, has calculated will be an extra 64¢ an hour.

"I work for two different employers who pay me on three different awards. When the rent is due I have precious little left for regular bills," Mr Olsen said. “An extra $50 would have been [nice]. We didn’t even get crumbs and it breaks my heart. At least they have given us something, but the fight is still on to get that living wage that we asked for in the first place.

“I’m just worried whether the increase will be wiped out if we get a penalty rates cut throughout the hospitality industry in the future.”

'Policies working': Minister

Federal Employment Minister Craig Laundy said the government was committed to delivering the right economic settings to keep growing the economy and the commission's decision was "further confirmation its policies were working".

“We are sticking to our plan for a stronger economy because this is what will keep creating jobs
and opportunities for all Australians and support sustainable wage growth,” he said.

Greens employment spokesman Adam Bandt said one in four people in poverty were working full-time.

"Even though the economy is apparently strong, this decision will still leave many full-time workers living in poverty," he said. "Until we enshrine in law a minimum wage above poverty level, inequality will continue to grow in Australia.”

Last year, the Fair Work Commission lifted the national minimum wage by $22-a-week to $694.90, an increase of 3.3 per cent. This raised the hourly rate by 59¢ to $18.29.