Record pay rises? Not for Gen Zers

Last week, UK news websites lit up with headlines about record pay rises, as economists warn that pay packets are increasing too quickly and will worsen the rate of inflation.

Data from the Office for National Statistics (ONS) shows that, between April to June 2023, annual basic wages increased by the highest amount since records began (7.8%). However, the same statistics show that younger workers lag behind older colleagues when it comes to pay.

According to the ONS, workers aged 18-24 have seen their earnings increase by 38% since records began (not adjusted for inflation). This is compared to all other age groups, which have each enjoyed an average uplift of 42.6%.

The figures suggest that entry-level roles are being underpaid in the UK, highlighting the need for bosses to up salaries in order to retain talent.

Entry-level pay gap widens

One of the top jokes at this year’s Edinburgh Fringe festival was this one-liner from Amos Gill: “Last year I had a great joke about inflation. But it’s hardly worth it now.”

It’s been difficult for workers to see the funny side of inflation this year. The rising cost of living is miserable for employee wallets. Despite record pay rises, the rate of growth has still been easily outpaced by inflation, causing real wages to fall.

The ONS data shows that young people have been most impacted financially by the crisis. The gap between salary increases for 25-64 year-olds, versus for 18-24 year-olds – who tend to work in more junior roles – has widened by just under 5%.

This figure comes despite the National Minimum Wage (NMW) for both 18-20 year olds and those aged 21 and over, increasing by an average of 55.1% over the same time period (not adjusted for inflation).

Earlier this year, research by money.co.uk found that one in eight 16-24 year-olds were ‘severely suffering’ over money concerns as wages nosedived, the most of all age groups analysed. 26.12% said they’d had to borrow money from family or friends to cover debts.

Meanwhile, workers aged 25-64 years old have experienced a near identical increase in their pay growth, raising questions about the impact this wage-age gap might have on workplace relationships and overall employee satisfaction.

Older workers stay in the workforce for longer

The age bracket with the largest increase in salary was those aged 65 and over. Not adjusted for inflation, these workers are earning 56% more in 2023 than they did in 2014.

However, the average salary for over 65s is still around £1,200 less per month than those aged between 50-64. Taking this into account, the increase can be attributed to changes to the state pension age.

Earlier this year, the Government confirmed the State Pension age will rise to 67 by the end of 2028. The ONS data suggests older workers are having to stay in the workforce for longer, or take a phased retirement, to be able to save for their golden years.

Managers feel “put off” by Gen Z pay demands

While the ONS data proves that companies are reacting to the cost of living crisis by increasing salaries, its age breakdown indicates that employers are specifically prioritising older workers in staffing budgets this year.

This group has likely worked in the business for longer and may be viewed as more valuable compared to junior roles. Research from job search engine Adzuna shows that vacancies are rising across all employment types except for graduate roles.

Recruiters have reported feeling “put off” by the demands of younger workers for flexible working arrangements and other benefits.

Managers echo these concerns. They argue that Gen Zers are the ‘anti-ambition’ generation, and lack the effort and motivation to succeed in the workplace.

Earlier this year, Startups research found that graduate workers expect, on average, around £5,000 more from a base salary than the amount being advertised by employers.

The average starting salary was calculated to be £25,000 for a full-time worker who left university in 2020 – markedly lower than the expected starting salary stated by undergrads of £30,244.

CEO pay drastically outpaces worker raises

Bosses may complain that Gen Z are being too demanding with their requests for a raise. But the latest statistics indicate a disparity between the amount CEOs are being paid, versus workers.

Less than a month after the ONS statistics on wage growth were published, research by the High Pay Centre think tank has found that FTSE 100 chief executives received an average pay hike of 16% last year, taking their median pay to £3.9m.

In comparison, the average raise enjoyed by a UK company employee in 2022 was 6.2% – more than double the amount that CEOs have paid themselves.

Economists have warned that worker salaries must be lowered to curb rising food and energy prices.

Yet, as the cost of living crisis chews up employee pay, the fact that CEOs are being given pay rises worth double the rate of inflation casts doubt on this assertion.

Responding to the data, Gary Smith, GMB Union General Secretary, said: “If Ministers genuinely think high wages are going to cause spiralling inflation, they probably need to think about curbing pay at the top of the tree, rather than everyone else.”

Why companies need young talent

In the current, tightened labour market, pausing hiring for Gen Z employees might seem like a smart decision to preserve cash flow in the short-term – especially if their pay demands seem out-of-touch with the market reality.

Nonetheless, this approach will likely come back to bite business owners further down the line. By 2025, 27% of the workforce will be Gen Z.

Entry-level workers are an investment in future company talent. They provide a blank canvas for companies to train and upskill staff, a fundamental step in the succession planning process.

Particularly if older workers or senior leaders are seeing much bigger pay increases, squeezing the payslips of junior workers will exacerbate the disconnect between Gen Z and older colleagues and managers.

If staff feel underpaid, they are more likely to feel disengaged and unmotivated, the perfect formula to drive them towards anti-work trends like quiet quitting or career cushioning.

If morale lowers enough, they could resign – inflating staff turnover rate, and igniting workplace conflict amongst older employees who bear the brunt of the reduction in resources.

How much should you pay Gen Z?

There is no perfect number for deciding an entry-level wage. But there are ways to ensure that you arrive at a fair pay slip for new hires.

To pay junior employees properly, SME owners must take into account the industry average, the responsibilities of the position, and the candidate’s level of experience.

This will help them to work out a competitive rate for the position that can then be stated clearly on job adverts to attract the best, qualified candidates.

Remuneration can also be given indirectly, through employee add-ons like learning and development schemes. These perks will ensure entry-level workers feel they will progress in their career rather than stagnating – also beneficial for bridging the digital skills gap.

Read about 50+ employee benefits and perks you can use to reward and incentive staff without jeopardising budgets.