Labour force participation hits a 29-year low, splitting economists before the October 28 rate call
Public sector employment in Canada fell by 70,000 in September 2026, a fourth consecutive monthly decline, pulling total employment down 68,000 and lifting the unemployment rate to 6.5 percent from 6.4 percent in August.
Economists polled by Reuters had forecast a gain of 9,200 positions.
Public sector employment is down 119,000 from 12 months earlier, with most of that attributable to educational services.
Losses in September were concentrated in educational services, down 35,000, health care and social assistance, down 23,000, and manufacturing, down 13,000.
The labour force participation rate fell 0.2 percentage points to 64.8 percent, its lowest level since December 1997 excluding the 2020 pandemic period, which Statistics Canada attributed largely to population aging.
Average hourly wages rose 2.3 percent year over year to $37.64.
The release was the last major labour reading before the Bank of Canada’s October 28 interest rate decision.
Andrew Hencic, director and senior economist at TD Economics in Toronto, wrote in the bank’s September employment commentary that the focus should be on the unemployment rate and not on top line job losses.
He wrote that an “uptick in September brings it back to where it was in June.”
Hencic said the report “is going to pour some more cold water on near-term rate hike expectations for the [central bank],” putting market pricing at 27 percent odds of an October hike and 88 percent for December, the latter down from fully priced a day earlier.
TD expects the Bank to stay on hold this month.
Reuters reported investors saw a 25 percent chance of an October 28 hike, down from 40 percent before the release.
Andrew Grantham, senior economist at CIBC, wrote in a note to investors quoted by CBC News that the weakness in the employment data is “likely more a reflection of data volatility than the impact of new US tariffs.”
He wrote that the data supports CIBC’s call that the Bank of Canada will keep interest rates on hold at its two remaining meetings this year.
Capital Economics disagreed.
“The Bank of Canada still looks on course to raise the policy rate to the midpoint of its neutral range soon to guard against the upside inflation risks from energy and food prices,” senior North America economist Thomas Ryan said in a note cited by the Financial Post.
The Bank’s neutral range is 2.25 percent to 3.25 percent, placing the midpoint at 2.75 percent.
Royce Mendes, head of macro strategy at Desjardins, told Reuters that “Canadian central bankers will likely need to keep rates unchanged later this month,” while adding that higher energy prices feeding other categories of inflation “could force officials to tighten policy soon.”
Mendes said in a separate note cited by the Financial Post that the Bank now faces “the opposing forces of rising inflation and a slowing economy,” and that an aging population leaving the labour force “for now is keeping a lid on the jobless rate.”
Claire Fan, senior economist at the Royal Bank of Canada in Toronto, urged caution on the headline number.
“The monthly employment counts are notoriously volatile, and there are reasons not to read too much into the softer reading too quickly,” she wrote in RBC Economics.
Fan said she expects earlier labour market progress to be largely sustained and the unemployment rate “to broadly edge lower through the end of 2026.”
Sébastien Mc Mahon, chief economist at iA Financial Group, told BNN Bloomberg the public sector losses were not a surprise given the federal government’s stated goal of reducing the public workforce.
Prime Minister Mark Carney’s 2025 Liberal budget pledged to cut the federal workforce by 4.5 percent, or 16,000 jobs, within three years.
Douglas Porter, chief economist at BMO Capital Markets, graded the report 22.5 out of 100, the Financial Post reported, and noted education employment is down 4.2 percent year over year.
Porter told Reuters “the appropriate stance by the Bank of Canada is watchful waiting, particularly so with employment suddenly clouding over.”
September inflation figures and the Bank of Canada’s business and consumer surveys are due October 19.
