Benchmarks for assessing labour market health: 2025 update

Overview and current state of the labour market

Overview

This staff analytical note builds on Ens et al. (2021); Ens et al. (2022); Ens, See and Luu (2023); and Ens et al. (2024) to assess the health of the Canadian labour market. These earlier works established a framework for assessing the labour market given its diverse and segmented nature. This note includes the following:

• We provide an update on the state of the labour market, which has moved into modest excess supply since the 2024 update.
• We analyze two special topics that are important to understanding current and near-term labour market conditions:
  • We perform an in-depth analysis to better understand how recent changes to US trade policy may affect different parts of the labour market.
  • We explore the recent divergence of wage growth from other indicators and offer possible explanations for why wage growth remains above benchmark ranges despite the broader easing of the labour market.
• We update the range of benchmarks in our dashboard of indicators to ensure they remain relevant. To this end, we:
  • add an additional year of data
  • update the suite of wage indicators
  • refine the calculation of the Hodrick-Prescott (HP) filter for wage growth measures

Current state of the labour market

The labour market has transitioned into a state of modest excess supply (Chart 1). This can be attributed to both demand and supply factors. The demand for labour has diminished, partly due to past tightening of monetary policy. On the supply side, strong population growth during 2023 and most of 2024 increased the size of the labour force. These two factors culminated in an increase in unemployment, particularly among newcomers and youth.

Looking more closely across our suite of indicators, we find support for this narrative (Chart 2):

• Indicators that are typically more often associated with demand for labour (such as the vacancy rate) have softened considerably.
• Meanwhile, indicators of labour force transitions highlight that there have been few layoffs, as evidenced by the job separation rate actually outperforming its benchmark. This suggests that the rise in unemployment has come from labour force entrants being unable to find work rather than the existing workforce losing their positions. This driver of unemployment is evidence that labour supply factors have also contributed to the emergence of modest slack.

The next section covers two special topics. The first is the trade war triggered by recent changes to US trade policy. Before the start of the trade war, there were signs that the labour market had started moving close to balance. Notably, by January 2025, the unemployment rate had declined relative to its recent peak, and the job vacancy rate had plateaued after declining throughout 2023 and early 2024. The trade war has likely disrupted this recovery. A discussion of those impacts can be found below. The second special topic is the continued strength in wage growth. Despite most indicators suggesting either a balanced or a weak labour market, wage growth indicators remain high relative to their benchmarks.

Special topics

Areas of the labour market most exposed to US trade

The labour market dashboard was introduced to track the recovery from the COVID-19 pandemic, but it is equally suitable to track developments from other shocks. In this section, we discuss the indicators most likely to be affected by the ongoing trade war with the United States.

As discussed in the April 2025 Monetary Policy Report, the trade war is expected to have a significant negative impact on the Canadian economy and labour market. Overall, it may result in weak hiring across the economy and layoffs in some of the sectors most directly affected.

The effect at the sector level is also expected to be highly uneven. Analyzing data from Statistics Canada’s input-output tables, we estimate the share of employment by industry that is linked to goods exports to the United States.1 Industries more reliant on US exports are generally more likely to see worsening labour market outcomes.

This analysis suggests that approximately 2 million Canadian jobs in 2024 are linked to goods exports to the United States because those jobs are either in firms that export directly to the United States or in firms that supply inputs to other exporting firms (Table 1). About 41% of these jobs were in the manufacturing sector, while 9% were in wholesale trade and another 9% were in the mining, quarrying, and oil and gas extraction sector. Other important sectors include transportation and warehousing, and professional, scientific and technical services. The forestry industry is also heavily reliant on US demand, though it employs a generally lower number of people.

Table 1: Share of jobs by industry linked to exports to the United States

Sources: Statistics Canada and Bank of Canada calculations

Although these sectors are likely to be the most affected, the trade war would negatively affect virtually all labour market sectors over time. On the one hand, job losses in any sector would result in a loss of labour income and a broad-based reduction in household spending. Additionally, the uncertainty effects induced by the trade war are expected to have a broad-based impact on household and business confidence and aggregate demand.

Our analysis suggests that the effects of the trade war are most likely to be reflected in the following dashboard indicators:

• Unemployment rates for men: Manufacturing, the sector that could face the most job losses, is heavily dominated by male workers, who made up 71% of this sector’s workforce in 2024. The unemployment rates for men across all age groups are likely to move into slack before the aggregate unemployment rate does and by a greater margin. 
• Job finding and job vacancy rates: Weak hiring across all sectors due to uncertainty will likely be reflected in the job finding and job vacancy rates, even if the rise in unemployment takes longer to fully materialize. 
• Job separation rate: Layoffs in highly affected sectors would be reflected in an increase in the job separation rate.
• Average hours worked: Firms generally adjust labour input at both the intensive and the extensive margins. Therefore, a reduction in average hours worked is likely.
• Involuntary part-time rate: Recent changes to employment supports are designed to keep workers employed while they work fewer hours. This will likely increase the number of workers involuntarily working part-time.

These factors point to a general weakening of the labour market and a move toward a state of more significant excess supply.

Wage growth measures remain elevated

Measures of wage growth are still high relative to their benchmarks. This contrasts with most other parts of the labour market, which have seen pronounced easing. We suggest three possible reasons for this divergence.

Reason 1: Current wage growth reflects a catch-up in the public sector

One possible reason wage growth remains high despite emerging slack in the labour market is the delayed recovery of public sector wages. The wave of high inflation that followed the COVID-19 pandemic initially weakened workers’ purchasing power. Since then, strong wage increases have left real wages in the private sector above pre-pandemic levels. However, real wages for public sector workers have not fully recovered (Chart 3).

Since most public sector workers are unionized, their lagging real wages are likely due in part to the nature of collective bargaining. Contracts are typically renewed every few years and are therefore slower to react to labour market pressures. Wage growth in the public sector is now outstripping that in the private sector, which suggests some catch-up is occurring.

This could explain a significant portion of the discrepancy. For example, in March 2025, composition-adjusted wage growth from Statistics Canada’s Labour Force Survey (LFS) was at 3.6% year over year. This puts it above the upper end of this indicator’s benchmark range. However, if we isolate this measure for the private sector, the growth rate is only 3.3%, putting it within the benchmark range.

Reason 2: The effects of tight labour market conditions on wage growth are lagged

Another possible reason wage growth remains high is that it generally takes time for firms to adjust wages following a shift in labour market conditions. Empirical estimates suggest wage growth may lag behind labour market tightness by up to two years.2 This is likely due to the time it takes for workers and employers to update their wage expectations and negotiate.

Furthermore, evidence shows that the pay increases workers receive by changing jobs are larger than the pay increases workers receive from their current employers (Kostyshyna and Luu 2019). Time spent searching for a new job could increase the lag between labour market conditions and wage growth. In addition, given the current weakness in job finding and job changing rates, this lag could be longer than average.

These factors all suggest that wage growth should continue to ease in the future. This is also supported by wage growth expectations of firms in the Business Outlook Survey, which is a strong leading indicator of actual wage growth (Chart 4).

Reason 3: Labour market slack is concentrated among youth

Youth—individuals 15–24 years of age—represent a significant portion of the overall increase in unemployment since the start of 2023. This is a larger share than during other periods of rising unemployment (Chart 5). This is partly due to the high number of immigrants, who are generally younger than the rest of the population. In contrast, the increase in unemployment of prime-age workers has been less pronounced than in past cycles.

Youth are disproportionately likely to earn minimum wage: they represented over 50% of minimum wage earners in 2024.3 Minimum wages are set by provincial legislatures. In recent years, many provinces have chosen to increase minimum wages faster than usual in response to high inflation. The result of this is a flatter wage Phillips curve, where labour market tightness has little to no effect for minimum wage workers. This translates to less downward pressure on aggregate wages in periods of labour market slack.

Updates to the benchmark ranges

To construct the benchmark ranges, we use estimates that each convey valuable information on the state of the labour market. Each range includes:

• the HP filter (Hodrick and Prescott 1997)
• a modified Hamilton filter (Hamilton 2018; Quast and Wolters 2022)
• the most recent period the labour input gap was closed (Ens et al. 2022)
• model-based estimates used by Bank of Canada staff for potential output (Abraham et al. 2025)

We bound these ranges by the historical minimum and maximum since 2003. In this section, we outline three key updates for 2025.

Methodological changes to HP filters for wage growth

We now apply the HP filters for wage growth measures to the log levels of the wage series rather than the year-over-year growth rates. This mitigates the well-known “end-point problem,” where the latest data points have a disproportionate effect on the overall trend in the filter (see Hamilton 2018 for more details). This results in more plausible real-time benchmark estimates for the affected series.

Update to the suite of wage indicators

To ensure that the indicators included in this analysis reflect the measures most frequently referenced, we:

• drop the wage common indicator due to its discontinued use
• replace the LFS fixed-weight wage measure with the LFS-Micro wage measure (see Bounajm, Devakos and Galassi 2024)

Modifying the HP filters for all wage growth measures increases our estimate of the wage gap because this modification yields generally lower benchmarks for wage growth. In contrast, replacing LFS fixed-weight with LFS-Micro wage growth slightly reduces our estimate of the wage gap. As a result, these two changes offset each other somewhat, leaving our view of current wage pressures unchanged.

Additional year of data

We incorporate data released since the 2024 update (Ens, See and Luu 2024). Chart 6 compares the new 2025 benchmarks (in blue) with the 2024 benchmarks (in green) for the indicators that pertain to overall labour market conditions. Chart 7 and Chart 8 display the benchmarks and current levels for measures of job characteristics and labour market inclusiveness, respectively.

A notable narrowing in the benchmark ranges occurred for the vacancy-to-unemployment ratio, the Business Outlook Survey labour shortage measure and the employment rate. This is a result of the HP and modified Hamilton filters converging toward a similar trend. Other changes to the ranges are generally small and do not materially change our general assessment of the balance of supply and demand in the labour market.

Note: This chart presents the current value of labour market indicators when compared with their historical worst and historical best. Benchmarks are composed of the modified Hamilton filter, the Hodrick-Prescott filter, the corresponding value of the indicator during a period when the labour input gap was closed and, for selected indicators, trend estimates produced by the Bank of Canada. Employment levels by wage are not seasonally adjusted.
Sources: Statistics Canada and Bank of Canada calculations
Last observation: March 2025

References

Abraham, S., D. Brouillette, A. Chernoff, C. Hajzler, S. Houle, M. Kim and T. Taskin. 2025. “Potential Output in Canada: 2025 Assessment.” Bank of Canada Staff Analytical Note No. 2025-14.

Bounajm, F., T. Devakos and G. Galassi. 2024. "Beyond the Averages: Measuring Underlying Wage Growth Using Labour Force Survey Microdata." Bank of Canada Staff Analytical Note No. 2024-23.

Bounajm, F., J. G. J. Roc and Y. Zhang. 2024. “Sources of Pandemic-Era Inflation in Canada: An Application of the Bernanke and Blanchard Model.” Bank of Canada Staff Analytical Note No. 2024-13.

Ens, E., A. Lam, K. See and G. Galassi. 2024. “Benchmarks for Assessing Labour Market Health: 2024 Update.” Bank of Canada Staff Analytical Note No. 2024-8.

Ens, E., C. Luu, K. See and S. L. Wee. 2022. “Benchmarks for Assessing Labour Market Health.” Bank of Canada Staff Analytical Note No. 2022-2.

Ens, E., L. Savoie-Chabot, K. See and S. L. Wee. 2021. “Assessing Labour Market Slack for Monetary Policy.” Bank of Canada Staff Discussion Paper No. 2021-15.

Ens, E., K. See and C. Luu. 2023. “Benchmarks for Assessing Labour Market Health: 2023 Update.” Bank of Canada Staff Analytical Note No. 2023-7.

Hamilton, J. D. 2018. “Why You Should Never Use the Hodrick-Prescott Filter.” The Review of Economics and Statistics 100 (5): 831–843.

Hodrick, R. J. and E. C. Prescott. 1997. “Postwar US Business Cycles: An Empirical Investigation.” Journal of Money, Credit and Banking 29 (1): 1–16.

Kostyshyna, O. and C. Luu. 2019. “The State of Labour Market Churn in Canada.” Bank of Canada Staff Analytical Note No. 2019-4.

Quast, J. and M. H. Wolters. 2022. “Reliable Real-Time Output Gap Estimates Based on a Modified Hamilton Filter.” Journal of Business and Economic Statistics 40 (1): 152–168.

Statistics Canada. 2024. Symmetric Input-Output Tables, 2022. Catalogue no. 15-207-X2024001.

Endnotes

Acknowledgements

We thank Erik Ens and Mikael Khan and for their helpful comments. We would also like to thank Anhelina Havrylyuk and Ethan McTavish for their capable research assistance. Any errors are solely the responsibility of the authors.