The factors behind the rise in unemployment

Businesses’ decision not to lay off workers at a faster pace than they have been in the current cycle could be explained by the following factors:

• When the economy was in excess demand, businesses were trying to rapidly increase output. As economic conditions have cooled, businesses have been able to eliminate unfilled job vacancies and slow their pace of hiring rather than reduce the size of their workforce.
• If businesses are concerned about being able to find workers when the economy picks up, they may hold onto more labour than they currently need.1

The rise in the unemployment rate largely reflects the challenges faced by newcomers and youths, who have had a harder time finding work than others in the labour force (see Chart 7 in the Current conditions section). While these groups make up only about one-quarter of the labour force, they account for roughly three-quarters of the increase in the unemployment rate since the start of 2023.2

Several possible reasons can explain why newcomers and youths have been most affected:

• The overall pace of hiring has slowed as past interest rate increases have eliminated excess demand in the economy. Slowdowns in hiring disproportionately affect new entrants into the labour force, such as newcomers and youth.
  • These two groups tend to be employed in sectors that have recently seen weak employment growth, such as accommodation and food services.
• The number of newcomers has risen dramatically in recent years, mainly due to increased inflows of non-permanent residents.
  • Newcomers averaged roughly 11% of the labour force between July and September 2024. In contrast, they averaged 7% of the labour force in the last quarter of 2022 (Chart 24).