The Bank of Canada's approach to setting interest rates is becoming increasingly complex as the country's labour market undergoes significant structural shifts, according to a senior official. In a speech delivered in Montreal on Tuesday, external deputy governor Nicolas Vincent highlighted how demographic changes and cautious business practices are reshaping the employment landscape.
Labour market transformation
Vincent, speaking at the Centre interuniversitaire de recherche en analyse des organisations (CIRANO), noted that Canada's job market has recently shown signs of slowing, with mild excess supply emerging. However, he cautioned that it may take time for the central bank to determine whether these changes are temporary and cyclical or persistent and structural in nature.
Canada's aging population, combined with what Vincent described as a "low-hire, low-fire" environment, has resulted in a less dynamic labour market. Workers are increasingly reluctant to move between sectors, particularly from less productive to more productive industries, which hampers productivity growth, income expansion, and collective purchasing power.
Impact of interest rates and uncertainty
The sharp rise in interest rates during 2022 and 2023, coupled with economic uncertainties stemming from U.S. tariffs and conflicts in the Middle East, has prompted businesses to scale back hiring rather than resort to layoffs. This lower turnover means workers are also less likely to change jobs voluntarily, further reducing labour market fluidity.
Vincent emphasized that while monetary policy can assist the economy during periods of restructuring, the central bank must fully understand the nature of these labour market changes before making decisions. Adjusting the key interest rate cannot compensate for reduced supply caused by factors such as trade friction or population aging. Attempting to stimulate demand when the issue is structural could fuel inflationary pressures.
Structural challenges
"Traditionally, central banks respond to cyclical ups and downs in the economy by raising or lowering the policy interest rate... However, with structural change, our options are more complicated," Vincent stated. He reiterated that the central bank's primary goal remains ensuring inflation is low, stable, and predictable.
Vincent's remarks come amid rising long-term unemployment in Canada. According to data from Statistics Canada and the Bank of Canada, as of April 2026, 22.5% of unemployed individuals had been out of work for 27 weeks or more, significantly above the pre-pandemic average of 17.1% from 2017 to 2019.
Skills gap and AI exposure
From a structural perspective, Vincent pointed to a growing mismatch between the skills and experience workers possess and those demanded by employers. Over the past two years, job postings have increasingly required more experience, while the share of workers with no employment history has risen.
Artificial intelligence (AI) represents another "plausible structural explanation" for these trends, Vincent added. Job finding rates have declined most sharply in sectors highly exposed to AI, and entry-level positions have been particularly affected. However, he cautioned that it is still "premature to conclude that AI is the determining factor."
As Canada navigates these shifts, the Bank of Canada faces the challenge of distinguishing between cyclical fluctuations and deeper structural changes that require a nuanced policy response.
