Labour market’s stabilizing feature ‘may become a vulnerability when a downturn coincides with permanent, labour-saving technologies’
Canada's slow-adjusting labour market – long a cushion against recessions – could instead deepen and prolong job losses if the next downturn coincides with rapid artificial-intelligence adoption, according to a recent report.
Canada's labour market has historically reacted less sharply to recessions than that of the United States, with unemployment rising less but recovering more slowly, explains Rannella Billy-Ochieng’, Senior Economist at TD Economics, in the report.
"In past post-war downturns, Canada has experienced fewer job losses but slower recoveries than the United States. Canada has more shock absorbers, which cushion workers during recessions,” she says.
But it cautions that this stabilizing feature "may become a vulnerability when a downturn coincides with permanent, labour-saving technologies, such as generative artificial intelligence (AI)."
Small business confidence in Canada fell sharply in May, signalling weaker hiring, tighter wage budgets and more cautious workforce planning for HR professionals, according to data from the Canadian Federation of Independent Business (CFIB).
Downturns can accelerate permanent change
Billy-Ochieng’ writes that downturns "tend to catalyze strategic change inside firms," lowering the cost of reorganizing production when survival pressures intensify. She concludes that "downturns do more than pause hiring; they reshape it."
Statistics Canada estimates close to 60% of Canadian jobs have some AI exposure, concentrated in skilled cognitive roles requiring university training. Yet the report finds only about 10% of tasks can be performed quasi-independently by AI, with most still requiring human partnership.
Because AI excels at routine cognitive work, the report warns roles cut in a downturn may not return as before, raising the risk of longer jobless spells and skills erosion — meaning HR offboarding and redeployment plans should assume permanent redesign, not a temporary freeze.
Transition support over retention
The TD Economics report cautions against leaning on job-retention tools when the shock is structural rather than cyclical. Citing Organisation for Economic Co-operation and Development (OECD) assessments of COVID-era subsidies, it warns such measures, "when maintained too long or applied too broadly," can slow workers' movement away from shrinking tasks.
It recommends prioritizing "faster worker transitions through flexible, affordable retraining and human-centric skill development, rather than job retention," and notes Canada leads the G7 in AI talent concentration.
A Statistics Canada study cited in the report found 3 of 4 displaced workers who stayed jobless for a year never explored an adjustment strategy.
"Acting early will help to limit long term labour market damage," Billy-Ochieng' concludes.
A previous RBC report about Canada’s labour market – authored by assistant chief economist Nathan Janzen and economist Annie Zheng – warned that two forces are converging: record-high retirement rates among aging baby boomers, and tightening immigration policy that is cutting off the main pipeline of younger workers.
Monthly retirements have climbed to roughly 25,500 workers per month — nearly double the rate of two decades ago, when retirements averaged closer to 14,000 per month, the report says. The youngest baby boomers won't turn 65 until 2029, meaning the retirement wave has further to run.
RBC projects this will continue weighing on Canada's labour force participation rate, which has already declined 4.5 percentage points over the past two decades due to population aging.
What can employers do about this?
Billy-Ochieng’ points employers toward redesigning roles around human-AI complementarity rather than treating AI as a straight headcount substitution.
She notes that "as AI capabilities expand, firms are likely to reorganize how work is structured around this partnership," and that this is "a structural change in how work is organized and not a temporary adjustment".
On developing people, the report's central message is that retention is the wrong default when the change is permanent. It urges prioritizing "faster worker transitions through flexible, affordable retraining and human-centric skill development, rather than job retention," and warns that the alternative "risks higher long-term unemployment and worsened productivity scarring." It also flags a practical barrier employers and program designers should heed: "The medium of delivery for training also matters because many workers opt out of retraining opportunities because of financial, time, and family constraints,” says Billy-Ochieng’.
Finally, the report points to which capabilities to build. It says workers will need to "be agile, teachable, and lean into human-centric skills (e.g. judgment intensive, social, and communication)," and that "workers who can pair tacit knowledge (e.g. experience & intuition) with formal codified knowledge (e.g. book learning) are better positioned to navigate displacements" — a steer toward valuing and cultivating experience alongside formal training.
