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The reduction of the workforce in Canada exposes a challenge that goes beyond current unemployment: retirements at a record pace, fewer young people entering the market, and reliance on immigration may place companies before a shortage of workers in the coming years.
Canada is approaching a new phase of labor shortage, even with unemployment still high, as record retirements, immigration restrictions, and a decline in the young population reduce the available workforce in the country.
Labor shortage appears before recovery
The combination seems contradictory. The unemployment rate remains high, pressured by the Bank of Canada’s monetary tightening cycle in 2023 and 2024 and the disruptions associated with American tariffs. Still, structural signs point to fewer workers available.
This scenario gives policymakers room to maintain restrictive immigration limits. The problem is that the apparent current slack hides a demographic shift that reduces the labor supply.
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With less job growth, or small declines, conditions per worker may improve. The unemployment rate tends to fall because the equilibrium employment rate has dropped in Canada.
For job seekers, especially young people struggling to enter the market, the change may ease the competition for positions. For companies, however, the labor shortage is likely to return once the high unemployment is absorbed.
Monthly retirements reach 25.5 thousand workers
Retirements have reached a structurally high level in Canada. About 0.12% of the workforce leaves the market monthly, equivalent to 25,500 workers per month.
The number is almost double the average recorded two decades ago, when retirements were around 14,000 per month. The main explanation lies in the advancement of the baby boomer generation, born after World War II.
This wave may have reached a high point, but it has not yet reached its limit. The youngest baby boomers will turn 65 in 2029 and 70 in 2034, keeping the outflow high until the next decade.
Retirements tend to increase among workers over 55 years old and peak between 65 and 69 years old. Part of the population remains active for longer, especially the immigrant population, which represents 28.4% of the Canadian workforce.
Aging has already reduced the labor force participation rate by 4.5 percentage points, which measures the portion of the population aged 15 or older working or looking for work, compared to two decades ago.
Canada relies on immigration to renew workers
Without immigration, the Canadian working-age population would decrease. The decline in fertility after the baby boom reduced the natural replacement of workers.
In Canada, the population in each age group up to 35 years is smaller than the next group. This means that the entry of potential young workers tends to shrink while a large portion of the workforce retires.
The trend appears in recent data. In April, the population under 35 years old fell by 120,500 people compared to the previous year. The available workforce in this group decreased by 76,000 people, despite a slight increase in participation.
Part of this recent decline is associated with the net flow of temporary residents. Without the impact of immigration, the population between 15 and 34 years old would fall by 186,000 people per year over the next five years, or 15,500 per month.
Maintaining participation rates by age, the number of available workers under 35 years old would decrease by 139,000 per year, averaging 11,600 per month.
Companies already report shortages in specific sectors
In the short term, the reduction in the workforce is not expected to pose a widespread obstacle to hiring, because youth unemployment remains in double digits. This environment may favor those trying to get their first job.
Pressure is expected to grow as the market improves and the unemployment rate falls. Immigration limits may need to be relaxed once the share of temporary residents approaches the federal target of 5% of the total population.
The expectation is that this target will be reached around mid-2027. Even so, the expected relaxation may not be enough to fully offset the structural challenges in labor supply.
Signs of shortage are already appearing. About 17% of companies surveyed by the Canadian Federation of Independent Business report a lack of unskilled or semi-skilled workers, down from over 40% in 2022, but close to the pre-pandemic standard.
In the Bank of Canada’s Business Outlook Survey, about one-fifth of companies also reported labor shortages and said they expect an increase in the intensity of the problem.
The shortage of workers does not affect all sectors in the same way. Accommodation, food services, and construction more frequently cite the shortage as a short-term growth obstacle than demand.
The Canadian challenge is not only in creating jobs but in the ability to keep enough people working as the population ages. What do you think of this change in the labor market?
With information from RBC.
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