Rising unemployment in Canada is obscuring longer-term labour supply pressures, as retirements increase and the pipeline of younger workers thins without immigration. Monthly retirements have almost doubled to about 25,500, and are expected to stay elevated into the 2030s. At the same time, the population of potential workers under 35 already in Canada, excluding immigration, is projected to fall by roughly 186,000 a year over the next five years, setting up tighter labour conditions over time.
By 2026, the available workforce is forecast to shrink faster than the overall population for the first time on record outside the pandemic, reflecting a growing share of Canadians reaching retirement age. While a high jobless rate eases near-term labour shortages, the pressure on labour supply is expected to build as per-worker labour market conditions improve and unemployment declines. The article was produced with the help of an AI tool and reviewed by an editor.
Labour Market Dynamics and the Bank of Canada
We see the current high unemployment rate, which Statistics Canada just pegged at 6.4% for April 2026, leading many to price in Bank of Canada rate cuts. This focus on short-term slack, however, overlooks a more significant structural change. We believe this is creating a mispricing opportunity in the rates market.
Underneath this surface, a long-term labor shortage is building as monthly retirements have surged to around 25,500. This demographic shift, combined with a shrinking under-35 workforce, is set to tighten the labor market significantly. We expect this will inevitably lead to upward pressure on wages, even if it’s not visible today.
This looming wage pressure suggests that inflation will remain stickier than the market anticipates, staying above the Bank of Canada’s 2% target from its current 2.9%. The Bank will therefore have less room to cut interest rates than is currently priced into overnight index swaps. We think the odds of them holding rates steady for longer are being underestimated, much like how markets in late 2023 wrongly priced in aggressive rate cuts for 2024.
Investment Strategies in Response to Labour Trends
In the coming weeks, we are looking at positions that would benefit from the market repricing a more hawkish Bank of Canada. This involves buying put options on bond ETFs like the iShares Core Canadian Universe Bond Index ETF (XBB), which would profit as yields rise when rate cut expectations fade. The recent stability in 10-year government bond yields around 3.5% feels like a temporary floor before the market wakes up to the inflation risk.
We also see an opportunity in the Canadian dollar, which is currently trading around 73.5 cents USD. If the Bank of Canada is forced to hold rates higher for longer than the U.S. Federal Reserve, interest rate differentials will favor the loonie. We are considering buying call options on the CAD/USD currency pair to position for this potential strength.
