Canadian Analysis

Canada’s labour market is experiencing a fundamental structural shift as population growth pauses after unprecedented acceleration in recent years.

As a result, what counts as “strong” or “weak” employment growth needs to be recalibrated. The “breakeven employment” rate—the pace of job creation needed to prevent unemployment from rising—is shrinking dramatically with fewer jobs needed to absorb new entrants into the labour market.

Canadian labour market data is notoriously volatile month to month, but on average smaller job gains in 2026 (or even small declines) would likely still be sufficient to move the unemployment rate lower—a sharp contrast to 2023-2025—when ostensibly solid job growth was still not enough to absorb new market entrants, and the unemployment rate rose.

This fundamental shift requires policymakers and analysts to recalibrate their interpretation of labour market data. Aggregate economic growth numbers may not look better in 2026 even as we remain cautiously optimistic that per-household and per-worker economic conditions will improve, and the unemployment rate will decline.

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Immigration caps reverse labour force growth

When Canada’s population surged in 2023 and 2024, what appeared as strong employment growth from a historical perspective was insufficient to keep pace with unprecedented population (and labour force) growth.

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.

Yet, 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. By 2026, this will decline further.

With population growth at a standstill, and an aging population pushing the labour force participation rate gradually lower, the Canadian workforce could outright shrink in the year ahead by our count.

Against that backdrop, Canada’s breakeven employment growth rate is on track to be slightly negative—about -10,000 jobs per month on average in 2026.

This means modest job losses that would normally trigger recession concerns would instead be entirely consistent with a stable or slightly declining unemployment rate in the year ahead. Our projection for modest job gains would still be enough to push the unemployment rate lower.

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The longer-term structural challenge: Aging population

We have argued before that lowering temporary resident arrivals to Canada might help address short-run housing affordability and public service availability issues, but one of the costs of the policy will be the population aging more quickly, and that could add to the intensity of future labour shortages.

Canada’s population is continuing to age as post-WWII baby boomers retire. This creates a widening structural gap between consumer demand and available labour supply since retirees remain economically active consumers, but no longer contribute productive working hours.

New immigrants are, on average, younger than the Canadian population. That means 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.

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Labour shortages and policy tensions

An aging population shrinking the labour force relative to consumer demand could, absent offsetting labour productivity-enhancing investment, relatively quickly lead to a return in labour shortages and make current immigration restrictions more difficult to sustain. These dynamics 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 with the challenges of producing enough housing and public services that became highly evident in 2023 and 2024 still present.

But an aging population comes with its own costs, and if the unemployment rate declines as we expect 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—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.

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About the Author

Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.

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