Key Takeaways:
- Canada’s labour market is undergoing a fundamental structural shift due to a pause in population growth, requiring a recalibration of what constitutes "strong" or "weak" employment growth.
- The "breakeven employment" rate, the pace of job creation needed to prevent unemployment from rising, is shrinking dramatically due to fewer jobs needed to absorb new entrants into the labour market.
- Aggregate economic growth numbers may not improve in 2026, but per-household and per-worker economic conditions are expected to improve, and the unemployment rate is expected to decline.
- Immigration caps are reversing labour force growth, and the Canadian workforce could shrink in the year ahead due to an aging population and lower labour force participation rate.
- The longer-term structural challenge of an aging population will lead to a widening gap between consumer demand and available labour supply, intensifying future labour shortages.
Introduction to Labour Market Shift
Canada’s labour market is experiencing a significant structural shift as the country’s population growth slows down after a period of unprecedented acceleration. This shift requires policymakers and analysts to reassess their interpretation of labour market data, as what constitutes "strong" or "weak" employment growth is no longer the same. The "breakeven employment" rate, which is the pace of job creation needed to prevent unemployment from rising, is shrinking dramatically due to fewer jobs needed to absorb new entrants into the labour market. As a result, smaller job gains in 2026, or even small declines, would likely still be sufficient to move the unemployment rate lower, a stark contrast to the period between 2023-2025 when solid job growth was not enough to absorb new market entrants, and the unemployment rate rose.
Impact of Immigration Caps on Labour Force Growth
The surge in Canada’s population in 2023 and 2024 led to strong employment growth, but it was insufficient to keep pace with the unprecedented population and labour force growth. The average job growth of 45,000 per month in 2023 and 32,000 per month in 2024 represented the strongest two-year pace on record outside the pandemic recovery. However, when controlling for population and labour force growth, the unemployment rate rose nearly two percentage points over the period, a rate of increase historically indistinguishable from a recession. The rate of job growth that would have been needed to prevent the unemployment rate from rising over that period, the ‘breakeven’ rate, was closer to 60,000 per month. In 2025, reduced temporary resident arrivals already lowered the breakeven employment rate to 25,000 jobs per month, and by 2026, this will decline further.
Aging Population and Labour Shortages
The longer-term structural challenge facing Canada is an aging population, which is continuing to age as post-WWII baby boomers retire. This creates a widening structural gap between consumer demand and available labour supply, as retirees remain economically active consumers but no longer contribute productive working hours. New immigrants are, on average, younger than the Canadian population, so reducing temporary resident arrivals will accelerate population aging and intensify future labour shortages. Population aging has already lowered the Canadian labour force participation rate by more than 4 percentage points since 2008, and baby boomers will continue to hit retirement age in greater numbers over the remainder of the decade. This will lead to a shrinking labour force relative to consumer demand, which could, absent offsetting labour productivity-enhancing investment, relatively quickly lead to a return of labour shortages.
Policy Tensions and Future Outlook
The aging population and shrinking labour force will shape Canadian economic policy and performance not just in the year ahead, but into the next decade. Policymakers will be cautious about returning to a period of large short-term population growth, given the challenges of producing enough housing and public services that became highly evident in 2023 and 2024. However, if the unemployment rate declines as expected in 2026, pressure could grow to relax restrictive temporary resident caps currently in place into 2027 and beyond. The experience of rising unemployment in recent years was somewhat anomalous, as labour shortages were a growing persistent issue for businesses over most of the prior decade. An older population means those labour shortages could return more quickly than otherwise would be the case, making it essential for policymakers to find a balance between managing population growth and addressing labour shortages.
Conclusion and Future Implications
In conclusion, Canada’s labour market is undergoing a significant structural shift due to a pause in population growth, and policymakers and analysts must recalibrate their interpretation of labour market data. The aging population and shrinking labour force will lead to a widening gap between consumer demand and available labour supply, intensifying future labour shortages. While aggregate economic growth numbers may not improve in 2026, per-household and per-worker economic conditions are expected to improve, and the unemployment rate is expected to decline. However, the longer-term structural challenge of an aging population will require policymakers to find a balance between managing population growth and addressing labour shortages, making it essential to monitor the labour market closely and adjust policies accordingly.