Wage Growth and Age: Young Workers Continue to See Better Wage Growth

Wage Growth and Age: Young Workers Continue to See Better Wage Growth

This article was updated on Aug. 23, 2018.

According to the ADP Research Institute® Workforce Vitality Report (WVR), the last year has been good for workers under age 25. They continue to outperform all other age groups, according to the Workforce Vitality Index, with wage growth of 4.3 percent in the second quarter of 2018.

So what is driving the relationship between wage growth and age, and how does it affect the career plans of the youngest members of America's workforce?

Young Workers Aren't Big Earners

One important factor that's likely driving wage growth among young people is simple arithmetic. According to the Bureau of Labor Statistics (BLS), the median weekly earnings for these young workers is $519, or about $26,000 a year pre-tax (assuming 50 weeks of work). Compare that to workers aged 25 to 34, who have a weekly median of $794 ($39,700/year), and workers aged 35-44 with a weekly median of $971 ($48,550/year).

The relatively low absolute value of wages for workers under age 25 translates to larger relative wage growth compared to workers who make more money. An illustrative example: a $1/hour raise for someone who makes the federal minimum wage ($7.25) is a 13 percent raise, while a $1/hour raise for someone making twice the minimum wage is less than a 7 percent raise.

Why do young workers tend to make less money? It's because of where they work.

Young Workers Tend to Work in Leisure and Hospitality or Retail

Younger workers have had less time to cultivate the types of skills and connections necessary to secure the types of jobs that pay more money. Instead, many of them have low-paying jobs at places such as theaters, restaurants and banana stands.

In a 2017 report, the BLS found that, although workers below the age of 25 represented roughly 20 percent of hourly paid workers, they comprise "about half of those paid the federal minimum wage or less." Moreover, the report noted that around 60 percent of workers paid at or below the federal minimum wage were employed in the leisure and hospitality industry.

But because there are other jobs that pay better than minimum wage, workers with the ability to do so will generally seek better paychecks elsewhere. That may be one reason why, according to the WVR, the 16-24 age group has a substantially larger annual turnover rate (63 percent in Q2 2018) than other age groups.

But job switchers aren't the only young workers seeing wage growth. In fact, the WVR shows that wage growth was substantial for young workers who kept their jobs regardless of whether they moved to or from part-time to full-time work. Those who moved from full-time to part-time fared particularly well. That is likely due to the reverse-wage dilution effect that occurs when a 50-plus hour a week employee becomes a non-exempt hourly employee with compensation directly proportional to the number of hours worked.

High Wage Growth Is Less Important than Higher Pay

Because the relationship between wage growth and age for younger workers is more a result of their generally lower pay, it might not play a direct role in their career decisions. Certainly, for younger workers who are working in lower-wage industries, within-industry wage growth is likely important in the short term; when you make $8/hour, a 25 percent raise is a wonderful thing.

But after the celebratory milkshakes reach room temperature, you realize that your extra $2/hour doesn't go that far. It won't enable you to purchase a home, build up any savings or put away money for retirement. For young workers who consider relative wage growth (and there are probably at least a few), the inadequacy of large relative wage increases with respect to improving a worker's quality of life must inspire a very specific career planning trajectory, which can be summarized by the phrase "I can't be doing this when I'm 35."

These workers recognize this because it has been burned into their brains since preschool that the path to better pay leads through college or trade school. So they will take that path in the hopes that the relative wage increase they receive upon securing their first post-collegiate job will make them forget all about $10/hour paychecks.