Employment Gains Freeze in January

Employment declined by 25,000 in January (0.3 per cent). The labour force participation rate edged down to 65.0 per cent, a 0.4 percentage decrease, while the unemployment rate declined to 6.5 per cent. On a year-over-year basis, average hourly wages increased by 3.3 per cent.

Key insights

While Canada recorded strong employment growth over the final four months of 2025 after a rocky start to the year, the January Labour Force Survey is a reminder that volatility is likely to persist as we move through 2026.

Manufacturing employment, in particular, continues to be weighed down by tariffs and ongoing tariff threats from the United States. January data show that manufacturing employment has fallen below its May 2025 level, when tariff uncertainty was at its peak. And the headwinds are far from over. Last October, the U.S. administration imposed 25 per cent tariffs on certain wood-based Canadian furniture, and more recently threatened to impose tariffs on—and decertify—Canadian aircrafts. The takeaway from all of this is that uncertainty around trade policy is likely to persist throughout the year. A key turning point with a wide range of outcomes will come later in 2026, when the outcome of the U.S. midterm elections and the renegotiation of CUSMA take place.

Despite this lingering uncertainty, we expect labour markets to experience a modest recovery in 2026. Although consumer and business confidence remain subdued, we think the worst is over when it comes to economic turbulence caused by the trade war and see improving economic conditions throughout the year. That should support a pickup in hiring demand and allow employment to rise through much of 2026.

At the same time, many sectors are beginning to contend with a new challenge: a declining population. In the third quarter of 2025, Canada’s population contracted by 0.2 per cent. This demographic reversal has been gradually taking shape over the past year as new federal and provincial migration policies came into effect, and we expect the trend to accelerate in 2026 and persist through 2027. This shift will exacerbate labour shortages in some industries and constrain overall employment gains despite improving economic conditions.