Unemployed workers will receive a permanent $50 a fortnight increase to the JobSeeker payment once the coronavirus supplement is scrapped.
The new rate will be the equivalent of an extra $3.57 a day.
The increase lifts JobSeeker to 41.2 per cent of the national minimum wage and will cost $9 billion over four years.
Prime Minister Scott Morrison linked the new rate of JobSeeker to the vaccination rollout, saying it marked a new chapter in the country's response to the pandemic.
"So we are moving from short-term emergency measures to long-term arrangements that people can rely on should they find themselves out of work," he told reporters in Canberra on Monday.
"Our social safety net is a social contract. It is a contract between the government and Australians, but it is also a contract between Australians, and what you've heard today is about getting the balance of that right."
The increase will be paired with stricter eligibility and much harsher mutual obligation requirements.
The modest boost will not satisfy welfare and business groups who have spent years advocating for a meaningful increase to the dole.
The current supplement, worth $150 a fortnight, is due to end on March 31.
Cassandra Goldie from the Australian Council of Social Service said the permanent increase should have at least matched the temporary top-up payment.
"Anything below where the rate is now is a betrayal," she said.
Without government intervention the unemployment benefit would have returned to its pre-pandemic rate of $565 a fortnight, or $40 a day.
Greens leader Adam Bandt described the proposed increase as "a bloody insult".
"This decision will keep people going hungry. It will keep unemployed people facing homelessness," he said.
"We must raise the rate above the poverty line."
Labor will not stand in the way of the increase.
"It's important there be a permanent increase and that be done as a matter of urgency, just to provide certainty for people as well," Opposition Leader Anthony Albanese told reporters.
"I don't quite understand why this government has held back on this announcement."
The unemployment benefit rate has not been increased in real terms since the 1990s.
As the government prepares to increase the benefit, it is also putting the squeeze on unemployed people to find work.
There are about 1.2 million people on JobSeeker payments.
Social Services Minister Anne Ruston believes hundreds of thousands of welfare recipients are single, have no children and no medical barrier to full-time work.
Senator Ruston said various sectors were crying out for more staff.
"Whether it may be a short-term job in agriculture or casual work in the caring industry because modelling tells us that people who report earnings, even just a small amount, are at least twice as likely to exit the social security system," she said.
