The nation's lowest paid workers have been granted a 2.5 per cent pay rise with the Fair Work Commission announcing a more modest rise to the minimum wage than last year's increase.

More than 1.8 million people who are on the minimum wage will have their pay packets increased from July 1, from $640.90 per week to $656.90.

It means a pay increase from $16.87 to $17.29 an hour.

Gemal Babiker, 61, arrived in Australia from Sudan in 1998 and works as a shopping centre cleaner.

He said the increase was a drop in the bucket.

"A $16 a week [increase] doesn't cover a cup of coffee every day. A cup of coffee costs around $4," he said.

Mr Babiker said after working as a cleaner for 16 years, his superannuation balance was only $60,000 because his wages were so low.

Fair Work Commission president Justice Iain Ross said the increase was lower than last year due to a range of factors.

"The most significant change in economic outcomes since the last review is the reduction in inflation and aggregate wages growth," he said.

"Each measure of aggregated wages growth reflected a continuing moderation over the past year.

"The 12-month increase of 2.3 per cent and 2.8 per cent respectively for the wage price index and average weekly ordinary time earnings over the year to the March [2015] quarter is the lowest for the last decade."

Justice Ross said the lower inflation and aggregate wages growth favoured the more moderate increase.

"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.

Justice Ross said unemployment was on the rise with the Federal Government predicting a slower than expected transition to non-mining investment.

But Justice Ross also indicated there was evidence to suggest businesses could afford to pay higher wages.

"Business bankruptcy rates fell significantly in 2013/14 to the lowest level since 2008/09," he said.

"Business entry rates for all industries in 2013/14 at 13.7 per cent exceeded business exit rates at 12.7 per cent."

He said the relative living standards of minimum wage earners had risen over the past few years.

Business groups concerned by increase

The Australian Retailers Association, which represents business employing 1.2 million workers, had been calling for an increase of $5.70 per week.

The association's executive director Russell Zimmerman said the decision to increase wages by more than triple that figure will lead to job losses.

"Many small to medium enterprise retailers are reliant on a minimum wage workforce and the announcement today to increase wages during this time of low consumer confidence and low growth will sadly result in further job losses and business closures," he said.

"The minimum wage increase, coupled with weak trade figures and penalty rates, will only cause further damage to retailers who are struggling to keep their heads above water as it is."

The Australian Chamber of Commerce and Industry (ACCI) has also raised concerns some small businesses will have to cut back on staff further contributing to an already rising unemployment rate.

The chamber's employment, education and training director Jenny Lambert said most businesses were already running on lean margins.

"Most small businesses operate in a price-sensitive environment and are unable to pass these costs on to consumers," she said.

"So there is a real prospect it will lead to firms reducing staff numbers or the hours offered."

"ACCI had sought an increase of no more than $5.70 per week so Australia was better placed to navigate challenging times ahead as structural shifts reallocate demand for labour."

In contrast, the Australian Council of Trade Unions (ACTU) had been calling for a $27 increase, from $640.90 per week to $667.90.

That would have meant a pay rise for lowest paid workers from $16.87 to $17.58 an hour.

ACTU secretary Dave Oliver has expressed disappointment at the decision.

He said $16 is not enough to relieve the stress on low income households at a time when health care is going up by 4 per cent, education by 5 per cent and childcare by 7 per cent.

"We are extremely concerned that every year that gap is getting wider and wider and we're heading down the path of the US where we could have an entrenched class of working poor in this nation," he said.

"If the economy is travelling well and inflation is on the up, we're being told we have to exercise wage restraint.

"Now inflation is down, yet again it's exercising wage restraint. We just can't win."