"We remain of the view that modest and regular minimum wage increases do not result in disemployment effects or inhibit workforce participation", said Fair Work Commission president Justice Iain Ross.
The Fair Work Commission announced a 3.5 per cent increase from July 1 to $719.20 a week, or $18.93 per hour, in a bid to improve the living standards of the country's lowest paid workers.
Unions had sought a record rise of $50 (or 7.2 per cent), while the Australian Chamber of Commerce and Industry wanted $13 (1.9 per cent).
But the commission believed such a large increase would have caused a substantial risk to employment for many people.
The rise is understood to put Australia slightly ahead of Luxembourg in terms of the world's highest minimum wage.
The federal government hailed the ruling as a "carefully considered and balanced outcome", while Labor said the rise was necessary amid flatlining wages and cost-of-living pressures.
The RBA has been loath to heed its own wage hike recommendation, with employees at its note-printing subsidiary calling a strike last week to demand a 3.5 percent pay rise, rather than the 2 percent the central bank was offering.
ACTU secretary, Sally McManus, claims the increase is a "step forward to a living wage" but is still "not a living wage".
"(It) has gone some way to providing relief in a period of the lowest wage growth of more than 20 years", opposition frontbencher Brendan O'Connor told reporters in Adelaide.
The FWC said previous minimum wage increases had failed to help families surviving on the payment.
"It is a step towards a living wage, but we will not rest and will keep fighting until Australian workers have a living wage".
In a report this week, the Fraser Institute noted that most minimum wage earners are not poor or sole-income earners for a household but in fact a majority (55.7%) were teenagers or young adults 15 to 24, who could be hurt by reduced employment opportunities.