back to work in uncertain times

Canada added a higher-than-anticipated 76,000 jobs in January following gains of 91,000 in December and 44,000 in November. Meanwhile, for the second consecutive month, the total number of unemployed people in Canada declined, putting downward pressure on the unemployment rate. At 6.6% in January, the unemployment rate was 0.3 percentage points below its most recent peak of 6.9% in November. 

Beyond the headline numbers, there was further evidence of improving labour market conditions in January. Job creation was greater than the increase in the working age population (i.e., those aged 15+) for the second consecutive month, increasing the employment rate to 61.1%. Additionally, the proportion of working age people participating in the labour market (i.e., those aged 15+ who were working or actively looking for work) led to an increase in the participation rate to 65.5%.

These developments are encouraging when considering the broader context of Canada’s labour market. As recent as October, both the employment and participation rates had fallen to their lowest levels in almost three decades (excluding pandemic-related distortions). This recent period of softness was largely a function of rapid growth in Canada’s working age population, driven by record international migration, and a rate of job growth that couldn’t keep up. Since mid-2022, Canada’s working age population has increased by about 2.6 million while the labour force has increased by 1.7 million and total employment by 1.2 million.

Going forward, major changes to Canada’s immigration policy announced in November should prevent any additional downward pressure on the employment and participation rates from population growth. The bigger question now is whether or not the economy will be able to continue adding jobs, especially considering that Canada is on the precipice of a trade war with its largest trading partner. 

Should 25% tariffs on Canadian goods and services (and a lower 10% tariff on energy products) become the official policy of the new U.S. administration on March 1st, there would be severe ramifications for Canada’s labour market. Statistics Canada estimates that the manufacturing sector (equivalent to 1.9 million jobs, or 8.9% of total employment) is the most vulnerable to a trade war with some 641,000 jobs directly dependent on exports to the U.S. That’s not to mention millions of additional jobs in other industries with direct and indirect exposure to the U.S. Even if a trade war were avoided entirely, the uncertainty hanging over the Canadian economy as a result of these threats is likely to weigh on business investment and hiring, at least in the short-term.

Overall, recent signs of improving labour market conditions in January should do little to sway the Bank of Canada at its next interest rate decision on March 12th. Though the employment and participation rates have strengthened a bit from last October, they are still hovering near multi-decade lows. And while the unemployment rate has come off from its recent high, at 6.6%, it is still 0.9 percentage points higher than last January and 1.5 percentage points higher than two years prior. With the labour market still in a relatively weak state, and inflation trending near the 2% target for more than a year now, there is plenty of support for the Bank to follow through with another interest rate cut come March.