The minimum wage will go up 50c to $14.25 an hour from April 1 this year, Prime Minister John Key said this afternoon.
The increase is ahead of expectations of a 25c rise but remains well short of the $18.80 an hour living wage campaigners say is needed to feed two adults and two children in New Zealand.
The Starting-Out and training minimum wages will increase from $11 an hour to $11.40 an hour, which is 80 per cent of the adult minimum wage.
Mr Key said advice considered by Cabinet when it made its decision today was that the increase would result in a "relatively negligible" loss of jobs.
However that advice also said a rise to $14.50 an hour would result in the loss of about 2300 jobs.
Labour Minister Simon Bridges said the 50c rise balanced the needs of businesses and workers.
"Setting these wage rates represents a careful balance between protecting low paid workers and ensuring jobs are not lost."
Council of Trade Unions economist Bill Rosenberg said the increase was "unfair given several years of stagnating wages, an economy that is starting to grow, and widespread concerns about how that growth will be shared".
"This minimum wage increase goes little distance to addressing the inequalities in society."
Mr Rosenberg said the minimum wage was the only way other than through the taxes and benefits the government had to ensure wage and salary earners, particularly those on low incomes, benefited from a growing economy.
"A more effective system of collective bargaining would be a much fairer way to spread the economic benefits to the majority of the workforce while reflecting the situation that each industry is in."
Mr Rosenberg said that five years, Mr Key's Government had raised the minimum wage by 14 per cent including the increase announced today. After inflation, the increase over five years was just 3 per cent.
"The Government has been saying people should expect wage rises. The minimum wage review was a missed opportunity to ensure that everyone from the lowest paid upwards gets a decent increase after several years of hard times," he said.