Labor will propose a two-step process to transform the current minimum wage to a living wage if it wins the next election, with a plan to balance business concerns with lifting Australia’s lowest-paid employees from poverty.

The shadow employment minister, Brendan O’Connor, plans on ending weeks of speculation on Tuesday when he announces Labor’s plan to “make sure the minimum wage is a living wage”, with Labor gearing up for an election showdown with the government over low wage growth.

Under the Labor proposal, a Bill Shorten government would amend the Fair Work Act to first instruct the Fair Work Commission, which sets the nation’s minimum wage, to determine “what a living wage should be”, taking into account the views of all stakeholders, including the business community and unions.

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That would also take into account the amount of tax paid and family benefits or other social payments, as well as the increased cost of modern life, with the minimum wage objectives set before the advent of the internet or mobile phones, or household costs such as water utilities.

But once a living wage is determined, the Fair Work Commission would then be instructed to look into how long it could feasibly be phased in, “taking into account the capacity of businesses to pay, and the potential impact on employment, inflation and the broader economy”.

The two-step plan seeks to counter government attacks a hike to the minimum wage would force small businesses to close and lead to an increase in lay-offs, by having the independent umpire determine what a “fair and responsible phasing in of a living wage” constitutes.

“Labor will legislate so that that the commission’s highest priority will be making sure no person working full-time in Australia need live in poverty,” O’Connor said. “A living wage should make sure people earn enough to make ends meet, and be informed by what it costs to live in Australia today, to pay for housing, for food, for utilities, to pay for a basic phone and data plan.

“Labor will make sure that, over time, workers are paid a living wage, taking into account the capacity of businesses to pay, and the potential effect on employment, inflation and the broader economy.”

Facebook Twitter Pinterest Brendan O’Connor and the Labor leader, Bill Shorten. Photograph: Joe Castro/AAP

If elected, O’Connor plans for the Fair Work Commission to change its consideration of the minimum wage from the next annual wage review once the legislation passes the parliament “with wage increases to be responsibly phased in from the 1 July after that review”.

The living wage would not flow through to award wages and only apply to those who receive the national minimum wage, currently set at $18.93 an hour.

Turning the minimum wage into a living wage has been a key platform of Australia’s trade union movement, which embarked on a “change the rules” campaign with the sole intention of upping wages.

The former treasurer and federal ALP president Wayne Swan has also been a key driver of change from within the parliamentary party, arguing low wage growth was contributing to an increasing class of working poor and widening inequality, which would have impacts beyond the economy.

Australia has experienced the slowest sustained rate of wage growth since the mid 1940s, with nominal wages having grown at about 2% since 2015.

That low growth rate has increasingly become an issue as the federal election draws near, with the government arguing that economic growth and the nation’s low unemployment rate will bring about a natural reversal to stagnant wage growth.

“In the past year, company profits have grown five times faster than wages,” O’Connor said. “Labour productivity has outstripped growth in real wages in the past two decades, meaning Australians are working harder and better, but not being fairly rewarded for their effort.”

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Earlier this month, Mathias Cormann argued the slowed wage growth had saved jobs, telling Sky News: “The whole point – it is important to ensure that wages can adjust in the context of economic conditions – is to avoid massive spikes in unemployment, which are incredibly disruptive.”

“This is a deliberate feature of our economic architecture,” he added, a statement his cabinet colleague Linda Reynolds rejected as ridiculous when she confused it as coming from Labor, and then embraced in the same breath, when corrected as to its origins.

Last week, more than 120 economic and policy experts penned an open letter claiming the issue of low wage was not a problem which would “fix itself”, arguing for “proactive measures” to accelerate growth.

O’Connor said Labor’s living wage plan would join established policies to restore penalty rates, tackle wage theft and review wages of typically female-dominated industries, which make up some of Australia’s lowest paid industries.