The labour market is growing, but 4 million people remain excluded

The labour market is growing, employment has reached an all-time high (24.4 million) and the unemployment rate (for those aged 15–74) stands at 5.6 per cent; at the same time the labour force participation rate reached 67.0 per cent in the second quarter of 2026, rising again after several quarters of substantial stagnation (+0.5 percentage points compared with the first quarter). However, despite the progress made in recent years, there remains a large pool of people (around 4 million) who, whilst gravitating towards the labour market, are unable to enter it (the so-called potential labour force).

This was written by Public Finance Policy Document. Inactivity rates remain particularly high amongst women and young people aged 15–24 (41.3 per cent and 78.4 per cent respectively), still well above the European average (28.4 per cent and 59.6 per cent). In the second quarter of 2026, the labour market slack (LMS) indicator – which had fallen significantly since 2021 but had risen slightly in the previous quarter – stood at 14.3 per cent of the extended labour force, 3.3 percentage points above the European Union average. The figure, writes the DPFP, ‘indicates the existence of an untapped labour reserve capable of supporting labour force participation and potential growth’.

But what exactly is this potential labour reserve? We are talking about the unemployed, but also about underemployed part-time workers, the potential labour force – that is, individuals who are looking for work but are not immediately available (active but unavailable) – and those who, although not actively seeking work, would be willing to work (inactive but available). After remaining above 20 per cent for over a decade, by mid-2026 the ‘slack’ (as experts refer to the phenomenon) had fallen to 14.4 per cent of the extended labour force (the sum of the labour force and the potential labour force), a level which, however, remains higher than the EU average (11.8 per cent). The gap reflects, above all, the high proportion of available inactives within the extended labour force (7.2 per cent compared with 2.6 per cent in the EU); the proportion of part-time underemployed people (1.6 per cent) and economically inactive people (0.2 per cent) is more modest, and in fact lower than the EU average (2.4 per cent and 0.9 per cent respectively).

In absolute terms, as employment grew in the post-pandemic period, labour slack fell to 4.0 million people in the second quarter of 2026, roughly half the 2014 peak (over 7.9 million) and a figure currently in line with that of Spain and lower than that of France. The main component consists of the available labour force (around 2.0 million), followed by the unemployed (1.49 million).

Labour market slack remains uneven in terms of composition and is concentrated amongst groups with lower labour market participation, namely women and young people. This heterogeneity is particularly evident amongst the economically inactive who are available for work. Women predominate among this group; despite the downward trend over the last decade, they still account for around 55 per cent of the total (a reduction of around 7 percentage points since 2010); in terms of prevalence, the available inactives account for 8.0 per cent of the extended labour force for women, compared with 5.7 per cent for men. In terms of age, the majority are concentrated in the 25–54 age group (64 per cent, down from a peak of 66.7 per cent in 2021), whilst those aged 15–24 and 55–74 account for 16 per cent and 19 per cent respectively.