When the Bank of Canada (BoC) started to increase interest rates in 2022, its goal was to reduce inflation. Typically, higher interest rates make borrowing more expensive. This decreases consumer spending and business investment, helping to keep prices down. Importantly, raising interest rates also weakens the labour market by slowing job growth and limiting wage increases. As a result, workers have less ability to spend and demand falls even more, further curbing inflation. 

As expected, data shows that recent rate hikes have had a negative impact on Canada’s labour market. 

You can measure the strength of the labour market by looking at job vacancy numbers. High job vacancy numbers are a sign of a healthy job market. Around the time the BoC began raising interest rates in the spring of 2022, there were more than a million job vacancies, totalling 5.7% of total labour demand (the combined number of filled and vacant jobs).  

Over the past two years, however, the number of job vacancies has fallen from over a million in May 2022 to about 560,000 in May 2024. The job vacancy rate has dropped to 3.1%, which is even lower than it was in the fall of 2020 following the major labour market disruption caused by the COVID-19 pandemic. These changes suggest the labour market is weakening. 

You can also measure labour market health by looking at unemployment and underemployment rates.  

Unemployment refers to individuals who do not have a job but who are actively looking for work.  

Underemployment includes workers who are: 

  • jobless and wanted work, but have given up looking, 

  • jobless but on temporary layoff or waiting for a job to start soon, 

  • working part-time but looking for more hours.

Significantly, both unemployment and underemployment rates have grown over the past year. The number of unemployed workers increased by 220,000, pushing the unemployment rate from 5.9% to 6.8%. At the same time, the number of underemployed workers has grown by about 130,000, raising the underemployment rate from 11.3% to 12.6%. 

The BoC’s rate hikes have triggered a worrying shift in the labour market. With fewer available positions, workers are experiencing more competition and rates of underemployment and unemployment are on the rise.