First restart the Mac then check in System Settings Touch ID & Password (or the equivalent for your Mac) that the feature is turned on

If no better Force restart your watch i.e. press and hold both the side button and Digital Crown for at least 10 seconds, then release both buttons when you see the Apple logo.
Then while the Watch is restarting Force Restart the paired iphone Force restart iPhone – Apple Support (UK)
Remember it will only unlock the screen after sleep, not the original unlock when restarting the Mac or logging-in.