The Fair Work Commission has awarded the country's lowest paid workers a 2.5 per cent wage rise, less than last year.
Australia's 1.86 million lowest-paid workers are getting a lower pay rise this year, with the minimum wage going up by $16 a week.
The Fair Work Commission has awarded a 2.5 per cent wage rise for workers who are reliant upon minimum rates of pay, compared to three per cent last year.
Fair Work Commission president Justice Iain Ross said the most significant economic change since last year's wage review was the reduction in inflation and aggregate wages growth.
"We have had particular regard to the lower growth in consumer prices and aggregate wages growth over the past year because they have a direct bearing on relative living standards and the needs of the low paid," he said on Tuesday.
"The lower inflation and aggregate wages growth has favoured a more modest increase in minimum wages."
The weekly minimum wage will rise by $16 to $656.90 from July 1.
The increase falls below the $27 a week rise the ACTU wanted, but above the $5.70-$10.25 increase argued by business groups. Australian Retailers Association executive director Russell Zimmerman said the increase was a reasonable compromise although he was still concerned about jobs in the industry.
The Australian Chamber of Commerce and Industry, which wanted an increase of no more than $5.70 a week, said the awarded rise sits above the rate of inflation.
"We hold concerns that this increase is too high against the backdrop of softening labour market conditions and an economy undergoing structural adjustment," ACCI director of employment, education and training Jenny Lambert said.
"Most small businesses run on lean margins, operate in a price-sensitive environment and are unable to pass these costs on to consumers. So there is a real prospect it will lead to firms reducing staff numbers or the hours offered."
ACTU secretary Dave Oliver said the union was extremely disappointed in the wage rise.
"It doesn't address the household stress that low income earners are enduring at the moment," he told reporters.
"We are extremely concerned about this ever increasing gap between average wage earnings and the minimum wage."
Mr Oliver said healthcare costs had gone up by four per cent, education by five per cent and childcare by seven per cent a year over the past decade.
Melbourne cleaner Gemal Babiker, 61, said the $16 would do nothing for him.
"Really it doesn't make any difference. I came here dreaming about five per cent. I get 2.5 per cent. Last year we got three per cent.
"We're going down instead of going up."
Australian Industry Group chief executive Innes Willox said the wage rise would increase the strain on many businesses which were struggling in the difficult business environment.
He said the 2.5 per cent increase was only slightly higher than the pace of private sector wage increases in the broader labour market and should not place minimum wage employees at a significant disadvantage in the labour market.
He was pleased the commission rejected the $27 a week increase proposed by the ACTU which he labelled unrealistic.
ACCI's Ms Lambert said the federal budget had provided a bit of a fillip for small business.
"This is going to be a real hurt for small business and maybe cancel out the benefits. We need to do more to try and get the economy going."