Finance Minister Cristobal Montoro said the rise – approved at a weekly cabinet meeting – was “negotiated with other political groups”.
The minimum wage will rise from €764.4 to €825.5, an increase of €61.1.
That is higher than the monthly minimum wage of 618 euros in neighbouring Portugal but far lower than the minimum wage of €1,467 in France.
Prime Minister Mariano Rajoy was sworn in for a second term last month but this time around his Popular Party lacks a majority in parliament and needs to scrabble for approval from other opposition parties further to the left to win approval in parliament for legislation.
The Socialists had demanded a rise in the minimum wage to back the government's budget for 2017, which will need to include measures to reduce public deficit targets agreed with the European Union.
“We secured from the government a rise (in the minimum wage) of eight percent,” Socialist party spokesman Rafael Hernando told reporters, adding “this increase is the largest in 30 years”.
Hernando said the rise was an “indispensible condition” for the party's support for the 2017 budget.
Spain has agreed with Brussels to reduce its budget shortfall to 3.1 percent in 2017 from 4.6 percent this year.
Spain's two biggest unions, the UGT and CCOO, welcomed the increase but said it was “insufficient”.
Over 5.5 million Spaniards earn the monthly minimum wage, or an even lower salary, and “struggle to make ends meet”, they said in a joint statement.
The two unions will stage two days of protests across Spain on December 15th and 18th to pressure the government to drop its austerity policies and “respond to social needs”.