The 3 per cent pay rise, lifting the minimum wage to $640.90 a week, or $16.87 an hour, will affect people on the minimum wage and award-rate workers, including Australia's lowest-paid cleaners, retail and hospitality staff, childcare workers, farm labourers and factory workers.

Trade unions and employer groups are outraged — the ACTU, which had pushed for a $27 a week boost, has warned the increase would actually plunge low-paid workers deeper into poverty and would not be sufficient to cushion the blow of federal budget fee hikes for healthcare, education and petrol.

But Australia’s biggest business lobby, the Australian Chamber of Commerce and Industry, had urged an increase of no more than $8.50 a week, saying the labour market was soft and small businesses would crumble under further financial strain.

Fair Work Commission president Iain Ross said the outlook for contained inflation growth and relatively low aggregate wages growth "provide scope" for increasing the minimum wage without inflationary consequences.

"There are no signs of cost pressures arising from the labour market. There is no evidence of unusual levels of business failure," he said.

Mr Ross said inequality in Australians' earnings was rising, with average earnings and bargained pay rates outstripping the growth in minimum wages.

"This has reduced the living standards of award-reliant workers and reduced the capacity of the low paid to meet their needs," he said.

Trade unions argued for an increase from $622.20 to $649.20, up 3.9 per cent.

Dave Oliver, of the ACTU, said that 20 years ago Australia's minimum wage was nearly 60 per cent of average full-time wages, but was now about 43 per cent - the lowest proportion on record.

"This is a real blow to low-income earners," he said.

"Today's decision is going to compound the gap between average wage earners and the minimum wage."

Mr Oliver said the commission had acknowledged that inflation had flattened out, productivity was up, labour costs were down and there was growing inequality. But the commission "did not put their money where their mouth is", he said.

"They did not take into account the harshest budget we have seen in recent times. Low-income earners are going to get hit ... in regards to health, education, childcare, fuel and cutbacks to support payments. They are going to fall further behind."

The Australian Chamber of Commerce and Industry, in its submission to the annual wage review hearing, urged a 1.25 per cent pay rise of just $8.50 a week, less than half the projected cost-of-living increase of 2.7 per cent.

In its submission, the ACCI states economic growth is below trend, labour market conditions are weak, job opportunities for the low paid are diminishing and that "there are heightened risks to growth that the minimum wage panel must take into consideration". Chief operating officer John Osborn said an unreasonable rise would result in job losses and fewer jobs.

Justice Ross said the economic outlook was strong, with GDP growth expected to ease in 2014-15 before increasing to just below trend in 2015-16.

Employment growth is expected to rise in 2014-15, and the jobless rate is expected to increase only slightly, he said.

But the commission's expert panel said high levels of part-time and casual workers, and the high youth unemployment rate, were causes for concern.

The minimum wage rose by 2.6 per cent in 2012-13.

ACCI chief Kate Carnell said increasing wages by any amount more than $8.50 would threaten small business and stop more people getting jobs.

"We cannot avoid the economic reality that artificially high wages destroy job opportunities, particularly for our kids and grandkids," she said.

"These are the sorts of jobs that are often filled by the most vulnerable and low-paid workers, usually low-skilled and very sensitive to being priced out of existence by a one-size-fits-all approach by government."

Ms Carnell said the wage rise would be a "body blow" to employers already suffering under tough economic times.

"There is this combination body blow to many small businesses who are hit with wage rises, higher superannuation at 9.5 per cent from July and excessive penalty rates particularly on Sundays. Unfortunately, the thing that’s going to give way first – is jobs."

Croydon disability support worker Matthew Osborne, 46, said the wage rise would not be enough to ease the financial strain his family battles every day, and times were set to get tougher when the $7 GP co-payment and extra prescription fees are brought in.

‘‘I have to go to the doctor’s once a month, I have an ongoing medical condition ... so there’s the [wage] increase gone already,'' the father of two said.

‘‘My wages have hardly changed since 1999 ... it’s a joke. I don’t feel like we’re valued enough.

Mr Osborne said he was worried about being able to provide for his family.

‘‘All I’m doing is working and forking out.’’