(Bloomberg) — Both hiring and firing in the UK jobs market are slowing down as employers prepare for the new government to raise taxes and toughen up worker rights, a standstill that threatens to become a drag on the wider economy.

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High-frequency indicators suggest the number of workers at risk of being laid off in 2024 so far is running almost 12% below levels a year earlier. That is pushing potential layoffs to near historic lows, according to the Insolvency Service, a sign that businesses are still hoarding labor, afraid of being unable to rehire later on.

Companies aren’t adding workers either. Separate data from Indeed shows that vacancies have flattened out just below pre-Covid levels, in contrast to countries like France, Germany and the US, where postings are well above where they were in February 2020. The jobs site also warned that political uncertainty both at home and abroad, with the US election in November and escalating tensions in the Middle East, may well push the hiring pause into 2025.

The lack of churn in the jobs market risks prolonging the inflationary, growth-stifling labor shortages that have hampered the economy since the pandemic, making it harder for the Bank of England to cut interest rates.

Labor hoarding happens when companies hesitate to let workers go even when demand is subdued, for fear of not being able to hire again if activity picks up. It has blighted the economy in recent years after a sickness-driven exodus from the labor market left sectors from construction to hospitality unable to find the staff they needed.

While hoarding keeps down unemployment, it puts pressure on firms to raise prices to stop increased wage costs eroding their profit margins. It also stunts their expansion ambitions by tying up resources. BOE policymaker Megan Greene has warned the practice could force the central bank to keep rates higher than would otherwise be the case to keep inflation at the 2% target.

However, Governor Andrew Bailey signaled on Thursday that the BOE could be a “bit more aggressive” in cutting interest rates if inflationary pressures stayed contained. In an interview with the Guardian newspaper, he said such a situation might make the central bank “more activist.”

The UK jobs market has been in a wait-and-see mode for much of 2024 due to restrictive interest rates weighing on activity and political uncertainty in the run-up to the July 4 election.

Employment was little higher over the summer than it was at the end of 2023. Now, with the Labour Party in power for the first time in 14 years, nervousness persists as firms brace for tax increases and spending cuts in the Oct. 30 budget to fill a fiscal hole, and imminent legislation to give workers more security and bolster the role of trade unions. An employment rights bill is due to be introduced in Parliament this month.

The plans risk fraying Labour ties with the business community, which it courted before the election, with industry surveys showing confidence falling and warning of a hit to growth if the government presses ahead with policies that could deter investment.

“We’ve definitely seen that caution being played out much more in a drop in hiring for new vacancies rather than wholesale reductions to existing staffing counts,” said Jack Kennedy, senior economist at Indeed Hiring Lab. “A lot of employers are still sitting on their hands at the minute.”

The plunge in layoffs is particularly unusual given that it has come after the BOE’s most aggressive policy tightening in decades. The central bank’s 14 back-to-back interest rate hikes aimed to loosen the labor market, bringing down wage pressures that are feeding into prices.

“Persistent hoarding may slow the return of inflation to target by preventing the labor market from loosening,” Greene said in a speech in May. “But if firms suddenly capitulate and stop hoarding labor, unemployment could jump and inflation could undershoot the target.”

The drop in vacancies is creating a tough market for jobseekers. Recent Adzuna figures showed there were over two candidates per posting in September, the most in three years.

BOE rate-setters remain concerned over strong wage growth and a tight labor market fanning price pressures. While inflation is close to target currently and the BOE cut interest rates for the first time since the pandemic in August, officials have struck a cautious tone on more reductions. Money markets are no longer fully pricing in a cut in November.

Companies are “waiting to see whether they can hire rather than whether they should fire,” said Tony Wilson, head of the Institute for Employment Studies. “The underlying picture on demand and confidence is not terrible, but we still have problems on labor supply.”

(Adds Andrew Bailey comments in seventh paragraph)

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