By Daniel Hunter

The VocaLink FTSE 350 Take Home Pay Index, which measures private sector pay growth slowed to 2.0% for the three months to January, down from 2.6% for the three months to December.

This represents the largest percentage point decrease in take home pay growth seen since the three months to December 2010.

The VocaLink Manufacturing Index has fallen sharply for the second consecutive month to 2.9% for the three months to January, down from 3.6% for the three months to December. This latest movement is the sharpest decline seen since February of 2011.

Meanwhile, three month annual growth on the VocaLink Services Index has also dropped in January to just 1.9%, down from 2.5% for the three months to December.

The latest movements on the Index take annual growth of the FTSE 350 Take Home Pay Index back toward the average of 1.5% last witnessed over the course of 2009 and 2010. Weak economic conditions, as demonstrated by total UK output falling by 0.2% over the final quarter of last year, are holding back employment growth.

Private sector firms have indicated that they will make few new hires over the coming months and the unemployment rate is expected to steadily rise over 2012. Fragility in the labour market acts to constrain wage growth as employees lose bargaining power, suggesting that pay growth will struggle to return to more robust levels in the short term.

These latest trends in private sector take home pay growth are in contrast to public sector pay, which has remained broadly flat for five consecutive readings, with the VocaLink Public Sector Index rising to 2.1% for the three months to January, compared to 2.0% for the three months to December. Pay growth for public sector employees is now higher than for service sector workers for the first time since April 2011, despite the current pay freeze.

“The underlying weaknesses in the labour market are placing downward pressure on wages through increased competition among workers for jobs," David Yates, Chief Executive Officer at VocaLink, said.

"This is lowering the wage rates that workers are willing to accept. With further public sector job losses over the coming years and a tough trading environment for many private sector businesses, labour market conditions are not expected to improve significantly in the short-term. As a result, we will continue to see downward pressure on gross income growth.”

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