Canada’s 2025 Economic Crossroads: Wage Growth Surges as Immigration Slows and Unemployment Rises

Canada’s 2025 Shift: Rising Wages Amid Layoffs & Immigration Slowdowns

In 2025, Canada is navigating a complex economic landscape marked by rising wages, increased unemployment, and significant shifts in immigration policies. This paradoxical situation has left economists and policymakers scrutinizing the interplay between a tightening labor market and global trade challenges.

At the heart of this economic shift is the relationship between wage growth and inflation. The Conference Board of Canada projects that wages will outpace inflation in the coming years, driven by a shrinking labor supply. By May 2025, the national unemployment rate reached 7%, the highest since September 2016, excluding the pandemic period. Despite this, overall employment remains slightly stronger than at the end of 2024, signaling resilience in the labor market.

Average hourly wages increased by 3.4% year-over-year in May 2025, a trend expected to accelerate as employers compete for a shrinking pool of workers. This tightening labor market is partly due to federal immigration caps, which have slowed population growth. As a result, workers are gaining more bargaining power, potentially leading to further wage increases.

While real wages have grown over the past two years, challenges like housing affordability persist. Additionally, U.S.-Canada trade tensions could lead to higher prices for imported goods, such as vehicles and industrial machinery. However, inflation currently appears under control.

The labor market is not without its pressures. Total hours worked increased by 0.9% month-over-month in May 2025 and were up 1.1% over the previous year. However, sectors dependent on international students and exposed to trade risks are under strain. The Ontario Public Service Employees Union has highlighted a crisis in the college sector, with about 10,000 job losses tied to changes in federal policy on international students.

Youth and recent graduates are disproportionately affected, with post-secondary and university graduates facing an average unemployment rate of 11.2% in Q1 2025, the highest in over twenty years, excluding the pandemic. Job postings are down, particularly in trade-exposed sectors like manufacturing and driving, with regions such as Southwest Ontario bearing the brunt.

Canada’s economy is at a crossroads. Wage growth is outpacing inflation, but the unemployment rate remains elevated, and certain sectors, particularly education, are grappling with the impacts of policy and demographic changes. The longer-term outlook suggests wage growth will likely continue, especially as the labor market tightens. However, challenges remain in managing sector-specific job losses, youth unemployment, and emerging trade-related risks.

Canada’s 2025 Shift: Rising Wages Amid Layoffs & Immigration Slowdowns

The Conference Board of Canada expects the unemployment rate to decrease in the coming years, potentially dropping to 6.2% in 2026 and 5.8% in 2027. This projection reflects optimism about the labor market’s ability to recover from current challenges, despite the recent spike in unemployment. As the labor supply tightens, workers are expected to gain more bargaining power, potentially leading to further wage increases.

One of the key factors influencing this economic shift is the slowdown in immigration. Federal immigration caps have reduced population growth, directly affecting both labor supply and demand. This policy-driven change has created a ripple effect across industries, with certain sectors, such as education, bearing the brunt of the impact. The Ontario Public Service Employees Union has highlighted a crisis in the college sector, with about 10,000 job losses tied to changes in federal policy on international students.

Youth and recent graduates are facing significant challenges in the labor market. In Q1 2025, post-secondary and university graduates experienced an average unemployment rate of 11.2%, the highest in over twenty years, excluding the pandemic period. This disparity is attributed to a combination of factors, including automation, shifting industry demands, and a lack of job opportunities in certain sectors. The situation is further complicated by the decline in job postings, particularly in trade-exposed sectors such as manufacturing and driving.

Regional disparities are also a growing concern. Southwest Ontario, for instance, has been particularly affected by the downturn in trade-exposed industries. The combination of reduced job postings and higher unemployment rates in this region underscores the uneven impact of economic challenges across the country. Meanwhile, total hours worked increased by 0.9% month-over-month in May 2025 and were up 1.1% over the previous year, indicating some level of resilience in the labor market.

Looking ahead, Canada’s economic outlook remains uncertain. While wage growth is expected to continue outpacing inflation, challenges such as sector-specific job losses, youth unemployment, and trade-related risks remain persistent. The interplay between global trade tensions and domestic policy changes will play a crucial role in shaping the economy’s trajectory. Several economic indicators, such as GDP, are predicted to remain flat or experience only minimal growth, with downside risks remaining present.

Despite these challenges, the labor market has shown signs of resilience. The tightening labor supply, driven in part by the slowdown in immigration, is expected to continue driving wage growth. However, addressing the systemic issues behind youth unemployment and sector-specific job losses will be critical to ensuring long-term economic stability. As Canada navigates this complex economic landscape, policymakers will need to balance the competing demands of fostering wage growth, managing unemployment, and mitigating the risks associated with global trade tensions.

Conclusion

Canada’s economic landscape in 2025 is defined by a unique interplay of rising wages, elevated unemployment rates, and significant policy shifts. Despite a national unemployment rate of 7% in May 2025, the labor market shows resilience, with wages outpacing inflation and total hours worked increasing. However, challenges persist, particularly in sectors like education and manufacturing, where job losses and declining opportunities disproportionately affect youth and recent graduates. As Canada navigates this complex economic environment, policymakers must address systemic issues such as sector-specific job losses, youth unemployment, and trade-related risks to ensure long-term stability and growth.

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