The Evolving Canadian Labour Market and Implications for Bank of Canada Policy in 2026

The Canadian labour market in late 2025 has shown a mix of resilience and fragility, raising critical questions about the sustainability of recent employment gains and their implications for monetary policy. With three consecutive months of job growth and a declining unemployment rate, the economy appears to be stabilizing. However, sectoral imbalances, reliance on part-time employment, and the lingering effects of the U.S. trade war suggest that the current trajectory may not be a durable foundation for rate stability.

Labour Market Resilience: Sectoral Gains and Structural Shifts

According to the November 2025 Labour Force Survey, Canada added 54,000 jobs in November alone, with the unemployment rate falling to 6.5%-a 0.4 percentage point decline from October. This growth was concentrated in provinces like Alberta (+29,000), New Brunswick (+5,500), and Manitoba (+4,500)according to Robert Half, reflecting regional disparities in economic recovery. The health care and social assistance sector led the charge, adding 46,000 jobs (+1.6%), while accommodation and food services saw a 1.2% increase. These sectors, driven by long-term demographic and social trends, suggest a degree of structural resilience.

However, the wholesale and retail trade sector lost 34,000 jobs (-1.1%)according to Statistics Canada, underscoring the vulnerability of trade-exposed industries to external shocks. The U.S. trade war, which intensified in late 2025, has already caused job losses in manufacturing and transportationaccording to RBC analysis, sectors that remain critical to Canada's export-driven economy. This duality-strong gains in services versus softness in trade-sensitive industries-highlights a fragmented recovery.

Wage Growth and Population Dynamics: A Mixed Picture

Average hourly earnings in Canada rose by 3.6% year-over-year in November 2025, reaching $37.00 per houraccording to Statistics Canada. While this growth outpaces inflation, it is unevenly distributed. The private sector added 52,000 jobs in Novemberaccording to Statistics Canada, but wage pressures in sectors like health care and natural resources (+3.4% employment growth) contrast with wage stagnation in struggling industries such as retail.

Population growth has further complicated the labour market. The population aged 15+ increased by 29,000 in June 2025according to RBC analysis, but growth softened in the second half of the year. While this demographic expansion could support long-term demand, it has also contributed to a rise in the unemployment rate to 7.1% in August 2025, as trade tensions disrupted hiring in key sectors. By October, the rate stabilized at 6.9%according to Scotia Bank, but this recovery was driven largely by part-time job gains, which may not translate into sustained wage growth or economic stability.

Bank of Canada Policy: Balancing Rate Stability and Structural Risks

The Bank of Canada's October 2025 rate cut of 25 basis points reflects its cautious approach to a labour market that appears balanced but is underpinned by uneven fundamentalsaccording to Canadian Mortgage Trends. While the unemployment rate of 6.9% suggests a more neutral market, wage growth remains robust in certain sectors, creating a divergence that complicates policy decisions. The central bank has signaled a bias toward holding rates steady through 2026according to Morningstar, but analysts warn that structural shifts-such as the reallocation of capital and labor away from trade-exposed industries-could weigh on household spending and GDP growthaccording to Bank of Canada.

Forward-looking projections indicate that the Bank of Canada will maintain its 2.25% policy rate through 2026according to Bank of Canada, with inflation expected to remain near the 2% target. However, the outcome of U.S. trade negotiations and the pace of sectoral adjustments will be critical. If the trade war persists, further job losses in manufacturing and transportation could force the central bank to reconsider its stanceaccording to Morningstar.

Implications for Investors: Navigating Uncertainty

For investors, the current labour market presents both opportunities and risks. Sectors like health care and social assistance, which have shown consistent growth, may offer defensive exposure. Conversely, trade-sensitive industries remain vulnerable to policy-driven volatility. The Bank of Canada's rate stability is likely to support fixed-income markets in the short term, but structural uncertainties-particularly in the event of prolonged trade tensions-could reintroduce inflationary pressures or force a policy reversal.

Asset allocation strategies should prioritize flexibility, with a focus on sectors insulated from trade shocks and a balanced approach to equities and bonds. Given the Bank of Canada's emphasis on inflation control and its acknowledgment of external risksaccording to Morningstar, investors should remain vigilant about macroeconomic signals, particularly wage growth trends and trade policy developments.

Conclusion: A Delicate Equilibrium

The recent employment gains and falling unemployment rate in late 2025 suggest a temporary rebound rather than a sustainable tailwind for rate stability. While the health care and services sectors demonstrate resilience, the fragility of trade-exposed industries and the reliance on part-time employment highlight underlying softness. The Bank of Canada's policy trajectory will hinge on its ability to navigate these divergent trends, balancing inflationary pressures with the need to support a structurally evolving economy. For now, the central bank's cautious stance appears justified, but investors must remain attuned to the risks of a fragmented recovery.