Canada's labor market is undergoing a significant transformation as population growth stagnates after a period of rapid acceleration. This shift necessitates a reevaluation of what constitutes 'strong' or 'weak' employment growth. The 'breakeven employment' rate, which measures the pace of job creation required to prevent unemployment from rising, is decreasing dramatically. This means fewer jobs are needed to absorb new entrants into the workforce, a stark contrast to the situation in 2023-2025 when seemingly robust job growth failed to keep up with new market entrants, leading to a rising unemployment rate.
The volatility of Canadian labor market data makes it challenging to predict, but on average, smaller job gains in 2026 (or even slight declines) could still result in a lower unemployment rate. This is a significant departure from the past few years, when solid job growth was insufficient to manage the influx of new workers. As a result, policymakers and analysts must adjust their interpretation of labor market data, recognizing that aggregate economic growth may not reflect the improvements in per-household and per-worker economic conditions and the decline in the unemployment rate.
Immigration caps have played a significant role in this shift. When Canada's population surged in 2023 and 2024, employment growth appeared strong from a historical perspective, but it was insufficient to keep pace with population and labor 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 outside the pandemic recovery period. However, when accounting for population and labor force growth, the unemployment rate rose nearly two percentage points, indicating a recession-like increase. The 'breakeven' rate of job growth needed to prevent this increase was closer to 60,000 per month.
In 2025, reduced temporary resident arrivals lowered the breakeven employment rate to 25,000 jobs per month, and this trend is expected to continue in 2026. With population growth at a standstill and an aging population reducing the labor force participation rate, the Canadian workforce could actually shrink in the coming year. Against this backdrop, Canada's breakeven employment growth rate is projected to be slightly negative, averaging about -10,000 jobs per month in 2026.
This means that modest job losses, which would typically trigger recession concerns, would instead be consistent with a stable or slightly declining unemployment rate in the year ahead. Our projection for modest job gains would still be sufficient to push the unemployment rate lower. However, the longer-term structural challenge of an aging population cannot be overlooked. As post-WWII baby boomers retire, Canada's population is continuing to age, creating a widening gap between consumer demand and the available labor supply.
New immigrants, on average, are younger than the Canadian population, so reducing temporary resident arrivals will accelerate population aging and intensify future labor shortages. Population aging has already lowered the Canadian labor force participation rate by more than 4 percentage points since 2008, and this trend is expected to continue as baby boomers reach retirement age. An aging population, coupled with a shrinking labor force, could lead to a return of labor shortages and make current immigration restrictions more challenging to sustain.
Policymakers will need to carefully consider the implications of an aging population, which comes with its own costs. If the unemployment rate declines as expected in 2026, pressure may grow to relax restrictive temporary resident caps currently in place for 2027 and beyond. The experience of rising unemployment in recent years, coupled with persistent labor shortages, highlights the urgency of addressing these structural challenges. As Nathan Janzen, Assistant Chief Economist, notes, these dynamics will shape Canadian economic policy and performance for years to come.
