I dont think level has a role in lore, its more for the gameplay part of FFXIV. The guards are level 5, because the player meets them at the start of the game and the ones at other location are higher level, because the player meets them later. If FFXIV was compared to a real life you could see it like:

Starter town = Pre-school
Level 10-20 zones = Elementary
Level 20-30 zones = Middle School
Level 30-40 zones = High School
etc.

We grow up as we become older, our characters grow up as they increase the level.