If the European labour market feels confusing right now – that’s because it is. On the surface, the signals seem contradictory – hiring is slowing and budgets are tightening – but at the same time, skills shortages persist, competition for talent remains intense in certain areas, and AI is beginning to reshape roles in real time.

In a recent episode of the HR Means Business podcast, I spoke with Julius Probst, PhD – Senior Economist at Appcast, Inc and Director of Research of Recruitonomics – to try and unpack what’s really happening beneath the headlines – and what HR leaders need to do next.

A slowdown – but not a collapse

Julius was clear from the outset: this is not a structural breakdown of the labour market. However what we are seeing is a cyclical slowdown, driven by external shocks – most notably rising oil prices linked to geopolitical tensions. The impact is familiar: higher inflation, sustained interest rates, reduced consumer spending, and slower job creation.

In the UK, for example, this could push GDP growth down to around 0.5%, bringing the economy close to stagnation. Unemployment has already edged up to 5.2%, and workers have far less freedom to move roles than they did just two years ago.

For employers, that translates into fewer vacancies, more applicants, and reduced wage pressure – at least at headline level.

However this is only part of the story.

The rise of a three-tier labour market

I think one of the most important insights from our conversation is that averages are misleading.

Right now, three very different labour markets are operating simultaneously:

The first is AI talent, where demand is accelerating rapidly. Organisations are competing hard for individuals with the skills to build, implement, or work alongside AI systems.

The second is skilled trades — engineering, construction, and technical manual roles — where shortages remain acute. Brexit has intensified these gaps, and wages are rising accordingly.

The third is routine white-collar work, which is where the pressure is most visible. Administrative, customer service, and back-office roles are increasingly being automated, and hiring has slowed significantly.

In some cases, this is creating an unexpected reversal: skilled tradespeople can now earn more – and enjoy greater security – than graduates entering routine office roles.

AI is already changing the shape of work

AI is often seen as a future trend – but it’s not as it is already showing up in the data.

One of the clearest signals is the decline in graduate hiring. Organisations are using AI to reduce the need for entry-level roles, particularly in areas involving repeatable or process-driven tasks.

Julius was careful not to be alarmist however, as he compared AI to previous general-purpose technologies – from electricity to the railways – which disrupted existing jobs but ultimately created new industries and opportunities.

The reality is that the transition is uneven. Right now, younger workers are bearing the brunt. The people who most need to develop AI-related skills are finding it harder to access the workplace where those skills can be built.

A more cautious workforce

Candidate behaviour is shifting as jobseekers become more cautious – and less willing to move roles in an uncertain market – whilst at the same time, competition for jobs is intensifying, particularly in white-collar roles.

AI is adding another layer of complexity because job candidates can now submit large volumes of applications quickly, which increases noise and makes it harder for recruiters to identify the talent they need.

What should HR leaders do now?

Julius’s advice for HR leaders was pragmatic – and grounded in reality:

First, accept that volatility is the new normal. Economic shocks are no longer rare events. Workforce planning needs to be more dynamic, more responsive, and more frequent.

Second, don’t abandon early-career hiring entirely. Demographic trends are indicating that large numbers of experienced workers will retire in the next three to five years. Organisations that stop building their pipeline now risk a significant talent gap later.

Third, think sectors, not generialist. The impact of economic shocks will vary widely. Hospitality, transport, and energy-intensive sectors will face far greater pressure than technology or financial services.

And finally, treat flexibility as a strategy, not a perk. Hybrid working, for example, isn’t just about employee preference – it enables organisations to access talent beyond expensive urban centres, helping to reduce salary pressures, and improve retention.

Reading the signals

What stood out most from our conversation is that this isn’t a chaotic labour market – but it is a complex one.

The signals are there. But they’re uneven, nuanced, and often contradictory. The organisations that succeed will be those that move beyond headline numbers, understand the specific dynamics in their sector, and make deliberate, forward-looking decisions.

Because the labour market isn’t breaking – it’s evolving.

And the question is whether we’re paying close enough attention.

You can listen to our full podcast chat here – https://www.hrhappyhour.net/episodes/what-ai-and-economic-shocks-mean-for-work-in-europe/ – or through the image below