The Fair Work Commission has announced a 3.5 per cent increase to the national minimum wage, delivering workers their first real pay boost in three years.

On Tuesday, the Fair Work Commission (FWC) raised the minimum wage by 3.5 per cent, taking it from $24.10 per hour to $24.95.

President of the FWC, Adam Hatcher, said that the decision had been made to address declining living standards among minimum wage workers after years of high inflation had eroded their spending power.

“The principal consideration which has guided our decision is the fact that since July 2021 employees who are aligned by Modern Award minimum wages, or the national minimum wage, have suffered a reduction in the real value of their wage rates,” Hatcher said during the wage review hearing.

Inflation’s return to the RBA’s 2–3 per cent target range – 2.4 per cent over the 12 months to March 2025 – gave the commission flexibility to provide workers with a real wage increase for the first time in three years, Hatcher said.

The FWC said it was satisfied that the 3.5 per cent increase was sustainable, and would provide much-needed relief to minimum wage workers.

“Over the last three annual wage review decisions, the Fair Work Commission has repeatedly deferred taking any action to reverse this decline in real wages, out of a concern that this might result in the persistence of higher inflation, the result has been that living standards for employees dependent upon Modern Award wages have been squeezed,” Hatcher said.

However, the magnitude of the pay increase had been curtailed by considerations for Australia’s ongoing poor productivity performance, Hatcher said.

“Australia’s continuing poor performance in labour productivity growth has operated as a restraining factor on the size of the [wage] increase.”

Australia’s productivity growth has stagnated for a decade, the Productivity Commission has found. Over the long term, wage growth without productivity growth could pose inflationary risks, the RBA has warned.

“Productivity is how people can get real wage rises,” RBA governor Michele Bullock told journalists in April.

“If productivity didn’t pick up, then that means that the rate of nominal wage growth that can be sustained and be in line with the inflation target is lower.”

While Australia’s productivity challenges remain entrenched, the FWC said it saw no value in continuing to keep workers’ wages suppressed.

“The productivity problem which Australia faces will not be resolved by the indefinite continuation of the reduction in real wages which has occurred over the last four years,” Hatcher said.

Luke Achterstraat, CEO of the Council of Small Business Organisations Australia (COSBOA), warned that the pay rise would burden small businesses who were already struggling.

“Small businesses are facing a cost crisis across energy, rent, insurance and input costs. Today’s decision of a 3.5 per cent increase – which is above the current rate of inflation – will have ramifications for our small business engine room, many of whom are struggling to make a profit on already razor thin margins,” he said.

“For every dollar increase in the award rate, employers also face higher levels of workers’ compensation, payroll tax and, of course, another legislated increase in the superannuation guarantee from 1 July.”

However, Hatcher asserted that profit margins across the economy had recovered to their pre-pandemic levels, giving businesses space to absorb a real pay rise for minimum wage workers.

“Although businesses face challenging circumstances in recent times, business conditions have remained reasonably healthy, with the level of non-mining profits maintained in real terms and profit margins at approximately their pre-pandemic level,” Hatcher said.

If the FWC had not opted to raise wages above inflation, the reduction in living standards that workers had seen over the past three years could become a permanent fixture of Australia’s economic system, he warned.

“We are concerned that if this opportunity is not taken in this annual wage review, a loss in the real value of wages which has occurred will become permanently embedded in the modern award system and the national minimum wage and the reduction of living standards for the lowest paid in the community will thereby be entrenched.”