Canada's job market signals a tentative stabilization, but hidden weaknesses lurk

Labour Force Survey - September 2025

Canada’s labour market showed signs of cautiously improved footing in September, with an unexpected gain in employment largely driven by full-time jobs. But the headline numbers mask cracks in the underlying structure. As policymakers and economists parse the data, the question is whether the recovery has staying power — or whether ripple effects from tariffs, softening global demand and inflation pressures will push the market back toward turbulence.

A Modest Reprise After a Summer Slump

According to the latest release from Statistics Canada, employment rose by 60,000 (+0.3 %) in September, with the employment rate nudging up to 60.6 %. The unemployment rate remained unchanged at 7.1 %, after two months of declines had raised concerns.

The gain in September is a welcome counterpoint to the outsized losses of 41,000 in July and 66,000 in August, although early summer strength (an 83,000 gain in June) had masked growing fragility.

What stands out is that the increase was driven almost entirely by full-time employment (adding 106,000 jobs), offsetting a decline of 46,000 in part-time work. Still, total employment for the year thus far is barely up from December’s levels.

Under the Surface: Strains and Contradictions

That said, the details behind the gains are less reassuring.

• Hours worked declined by 0.2 % in the month, suggesting that even as more people hold “full-time” jobs, actual aggregate labour effort slipped.
• Permanent layoffs ticked upward, and longer durations of job search, especially among new labour force entrants, are a substantial contributor to elevated unemployment relative to a year ago.
• In trade-exposed sectors, the trajectory remains weak. Manufacturing, while posting a 28,000 gain in September, is still down year-over-year; and transportation & warehousing employment declined by 7,000 (−2 % year-over-year).
• Regionally, the story is uneven. Ontario’s unemployment rate ticked back up to 7.9 %, while Alberta saw a decline to 7.8 %. Quebec maintained the lowest rate nationally, at 5.7 %, even amid tariff pressures on its manufacturing base.
• On wages, average hourly wages for employees increased about 3.3 % year-over-year, up by $1.17 to $36.78—modest but not negligible.
• On an important structural front, skills mismatches are creeping higher: 16.4 % of core-aged workers with postsecondary credentials report working in jobs unrelated to their education (up 0.9 pts year-over-year), with recent immigrants particularly overrepresented.

Interpreting the Signals: Is This a Turning Point?

The September figures offer a cautious glimmer of stabilization, but the balance of evidence suggests we’re not out of the woods.

From the vantage of central banking, the report is unlikely to alter the Bank of Canada’s near-term trajectory markedly. Indeed, RBC economists have flagged that while the labour data is “less bad,” it may not be strong enough to derail an expected rate cut in October if inflation softens further.

That said, the Bank faces a delicate balancing act. Any further easing beyond October would depend on upcoming inflation prints and the fiscal stimulus mix. If deficit spending ramps up to undercut tariff headwinds, the risk of reigniting inflation will tilt the calculus toward fewer cuts.

From a macroeconomic outlook, projections remain cautiously optimistic: trade pressures are real and concentrated, but their worst effects may already be priced in. The bank still expects limited job losses in vulnerable sectors and projects the unemployment rate to peak near 7.1 %.

However, that scenario is vulnerable. A further escalation in U.S. tariffs, a sharper global slowdown, or a negative inflation surprise could push the labour market back into contraction. Already, weak signals in investment, export demand and consumer confidence are flashing warning lights.

Finally, for businesses and staffing markets, the message is mixed:

• In sectors less exposed to global trade, such as healthcare, services, public administration, demand for labour is holding up, but hiring is more cautious.
• Firms may still prioritize flexibility over headcount, favoring contract, part-time or contingent arrangements rather than full-scale expansion.
• Upskilling and internal training may become more important if labour supply in certain skilled niches tightens or mismatches widen.
• For workers, job security and duration of employment may increasingly matter as firms gauge economic uncertainty.

Looking Ahead: What to Watch

As we move into Q4 and 2026, a few key indicators will help determine whether Canada’s labour market has turned a corner or is slipping again:

1. Hours worked and labour force participation: if employment rises but hours remain flat or fall, it may suggest softness in productivity or demand.
2. Layoffs vs hiring dynamics: a sustained rise in permanent layoffs would be a warning sign of recessionary stress.
3. Wage growth and inflation linkage: if wages accelerate, that could reignite inflation pressures; a deceleration might open room for further rate cuts.
4. Trade data and export demand, particularly in sectors hit by tariffs, will be critical to watch for feedback into manufacturing and logistics employment.
5. Global and U.S. economic health: external shocks or contagion risks (e.g. from supply chain disruptions) could propagate inward.

In short, September’s labour report offers guarded optimism, but it is far too early to call the turn. For now, Canada’s job market seems to be holding its ground (for better or worse) in a world of elevated uncertainty.