Hidden talent, historic opportunity: AI’s power to close the UK’s Labour market gap
The UK labour market is facing a paradox. Employer confidence is subdued, vacancies have fallen, and hiring has slowed—yet businesses still struggle to find the right talent. At the same time, around nine million working-age adults are economically inactive, many of whom want to work but face barriers such as long-term health conditions, caring responsibilities, digital exclusion, or early retirement.
This mismatch between unmet employer demand and untapped human potential is holding back growth. What is becoming increasingly clear is that AI now sits at the centre of a practical, near-term solution.
CIPD’s Labour Market Outlook shows employer confidence remains low, with three-quarters of employers expecting rising employment costs in 2026. Adzuna’s data reinforces this picture: by late 2025, vacancies had fallen for six consecutive months, competition for roles intensified, and hiring slowed. Yet despite this cooling, skills shortages persist across key sectors.
Alongside this sits a deeper structural issue. One in five working-age adults is outside the labour market, and evidence from the Pathways to Work commission in Barnsley suggests that seven in ten economically inactive people want to return to employment.
For the UK, growth depends on addressing both sides of this challenge: supporting people into work while helping employers access the talent they need.
AI adoption is accelerating, and organisations are rethinking workforce design, skills, and talent pipelines. Government investment in upskilling, alongside new tools supporting responsible workplace AI adoption, signals clear intent.
Crucially, AI can transform how we tackle unemployment and economic inactivity. AI-driven tools can improve job matching, personalise support, translate skills more effectively, and connect jobseekers to training, healthcare, and flexible opportunities.
International evidence shows what is possible. Estonia’s employment service has demonstrated that AI-powered matching can help 10–15% more people stay in work. The opportunity for the UK to achieve similar outcomes is real.
In manufacturing, there are 55,000 unfilled vacancies, costing an estimated £6bn in lost output. The sector faces an ageing workforce and rising ill health, yet only a small proportion of firms are currently using AI in HR. Tools that translate skills more effectively and personalise recruitment are already showing impact. Work with AWE demonstrated that 20% of candidates were matched to roles they would not otherwise have reached, while first-year attrition dropped significantly.
Hospitality presents a different but equally pressing challenge: high turnover and constant demand for talent. Even as the sector adjusts, finding and retaining the right people remains critical.
Across both sectors—and beyond—the same pattern emerges: employers know talent exists, but struggle to reach it.
Behind the headline figure of nine million economically inactive people are individuals with varied strengths and needs:
AI can support these groups in tailored ways—from identifying flexible roles to connecting individuals with local support services or training opportunities.
Work with disabled people and inclusion experts reinforces this potential. When embedded properly and deployed responsibly, AI can act as a reasonable adjustment at scale—improving job matching, enabling flexibility, and reducing barriers that exclude capable candidates.
However, this is not without challenge. Digital exclusion remains a real issue, and innovation must go beyond digitising existing processes to genuinely transform access and inclusion.
There is a clear mismatch between labour supply and demand, but also a clear opportunity. Hidden talent pools exist, and employers face persistent vacancies. Tapping into these pools is not just socially valuable—it makes business sense.
Industry partners are already seeing this shift. AI-driven tools are improving job matching, enhancing career guidance, and enabling better workforce planning. In the UK private sector, these tools are already delivering results at scale.
Estimates suggest that wider adoption—particularly in the public sector—could help hundreds of thousands more people into work within the next few years.
Government has begun to act, with plans for a new jobs and careers service, a data and innovation hub, and pilots of AI agents in employment support. But the opportunity is broader. With the right ambition, the UK could significantly reduce economic inactivity by deploying proven tools at scale.
This is not just a challenge for government. Employers can act now.
As workforce design becomes more strategic, organisations that combine technology with labour market insight are unlocking new talent pools and improving outcomes. In a market where roles are evolving and expectations are rising, this shift is already underway.
Practical steps include:
These are not distant ambitions—they are achievable actions using tools that already exist.
But don’t be afraid to think long-term. Adoption across the whole span of the labour market as early as schooling – for example, using AI to integrate real-time jobs data into the curriculum – unlocks serious impact in engaging talent.
This work, recognised in the Digital Leaders AI 100 2025,has brought together partners across sectors to explore how AI can reduce economic inactivity and support productivity. It has deepened understanding of both the opportunities and the challenges, and highlighted the scale of impact that is possible.
What stands out is that AI is no longer a future concept in this space. It is already delivering more personalised, effective, and scalable outcomes for employers and jobseekers alike.
The opportunity now is to act with intent and ambition.
AI can help close the UK’s labour market gap—but only if we put it to work.
Read More Workforce & AI Skills
