Labour Force Projections for Canada, 2006-2031

by Laurent Martel*, Eric Caron-Malenfant, Samuel Vézina,  and Alain Bélanger

A low birth rate and aging of the population, which will accelerate in the years ahead, present many challenges for Canada. One of the most significant and pressing challenges involves the labour force, which is already¹ experiencing and will continue to experience profound and rapid change in the decades ahead. With the aging of the boomer generation, the absolute number as well as the proportion of older workers in the work force has risen sharply in recent years. Boomers are reaching retirement age and beginning to leave the workforce in large numbers. Meanwhile, the number of young people entering the labour force has plateaued and is expected to decline in the future as a result of the low birth rate that has occurred in recent decades.

Conversely, labour force participation rates continue to climb in Canada. Among men, the rates have risen for the past decade mostly for those over 50 years, while the increase for women was evident for all age groups. This rise in participation rates may well partly offset the impact of future demographic changes on the labour force.

The changes that the labour force is and will be undergoing could significantly affect the labour market, Canada’s potential for economic growth, government revenues and some social programs, notably so‑called ‘pay as you go’ plans.

In this context, it is both relevant and useful to describe and analyse the potential future evolution of the labour force in Canada and in the provinces. Using labour force projections, this article seeks to answer the following questions: is a drop in Canada’s labour force in the coming decades inevitable? What would be the impact if the recent rise in participation rates observed among older workers continues? What would be the impact of more immigration on Canada’s labour force? By answering these questions, this article will help to identify more clearly the changes needed to prepare our society for the population shift ahead.

Concepts and methodology

The labour force is defined as all individuals aged 15 years and older who work or who are looking for work. Thus, it is the pool of workers employed or available for employment in a population. The overall participation rate of the population corresponds to the share of the population aged 15 years and older actively in the labour force. It measures the size of the labour force relative to the total population aged 15 years and older, which includes students, retirees, persons with long‑term family obligations, and others who are not looking for work, in addition to those in the labour force.

The labour force projections used in this article are derived by applying participation rates by age, sex and province to the results of the most recent population projections for Canada and the provinces.²

Four scenarios for the future labour force

Four labour force projection scenarios are used in this paper, each of which combines different assumptions about the future growth of the population and the evolution of participation rates by age (Table 1).

Table 1 Projection scenario's for Canada's labour force

Three assumptions were used for future population growth. They correspond to the scenarios for low, medium and high growth in the most recent population projections. The medium growth scenario is based on extrapolating recent trends observed in each of the three components of population growth (birth rate, mortality and immigration). The low growth rate scenario assumes a lower birth rate, shorter life expectancies and less immigration compared to the average growth scenario, while the opposite is true of the high growth scenario. These three scenarios together offer a reasonable range of possibilities for the future evolution of the Canadian population, reflecting the uncertainty inherent in any attempt to project the future. Readers interested in more on the demographic component of these analyses are encouraged to refer to Appendix 1 of this article.

Two assumptions were developed for participation rates by age. The first assumes rates remain constant at their levels observed in 2005. The second assumes a continuation of the upward trends observed in the last decade, using data from the Labour Force Survey. Readers will find more detail on these assumptions in Appendix 2.

The combination of the three population growth assumptions and the two participation rate assumptions produce six scenarios for the future evolution of the labour force. Four were retained. Scenario 1, the so‑called “low growth” scenario, combines low demographic growth with participation rates held at the levels observed in 2005. Scenario 2 also assumes the continuation of participation rates recently observed in Canada, but combines it with medium rather than low population growth. By comparing scenarios 1 and 2, it is possible to isolate the effect that any slowdown in population growth might have on the labour force, since the evolution of participation rates is the same in both cases.

Scenario 3 combines average population growth with a continuation of the upward trend in participation rates observed over the past decade among men, especially those 50 years and older, and among women of all ages. Comparing scenarios 2 and 3 identifies the effect that higher participation rates have on the future evolution of the labour force, since population growth is the same in both cases.

Lastly, the so‑called “high growth” scenario assumes both strong population growth and the continuation of the upward trend of participation rates. By comparing it to scenario 3, it is possible to measure the impact that a higher birth rate and increased immigration might have on the labour force. The low and high growth scenarios also make it possible to identify the range of the possible changes, reflecting the uncertainty inherent in any exercise projecting future trends.

Results: Labour force size expands in absolute terms under three of the four scenarios …

Figure 1 presents the observed (1981‑2005) and projected (2006‑2031) number of people in Canada’s labour force. In three of the four scenarios, the growth of the labour force should continue uninterrupted until 2031. Under scenario 2, which extrapolates the recent trend, the labour force would reach 19.4 million in 2031, an increase of 9.0% from 17.8 million people in 2005. If participation rates continue to rise (scenario 3) the labour force would reach 20.5 million in 2031, or 1.1 million more than in scenario 2. In scenario 3, the increase would be 15.9% between 2005 and 2031. If these participation rates are combined with stronger population growth (scenario 4), the labour force would reach 21.8 million in 2031, a rise of 22.9% from its 2005 level.

Figure 1

Only scenario 1 with low growth does not generate steady increases until 2031. According to this scenario, the labour force would peak at 18.6 million people in 2017 and then fall slightly to 18.1 million in 2031. However, it is noteworthy that this number would still be higher than the labour force observed in 2005   (17.8 million).

With an average annual growth rate of between 0.1% (scenario 1) and 0.8 % (scenario 4) between 2005 and 2031, the growth in the labour force still would be less during the projection period than the 1.5% observed between 1980 and 2005. This reflects boomers reaching retirement age. As a result, between 2011 and 2015, the annual growth rates in the labour force will fall by at least 50% under all scenarios.

… but the overall participation rate inevitably declines

The overall participation rate – the proportion of the total Canadian population aged 15 years and older in the labour force (Figure 2) – gives a better idea of the scope of the coming changes. The overall participation rate drops sharply by 2031 under all of the projection scenarios. From approximately 67% in 2005, the participation rate would fall to about 58% in 2031 under the assumption of participation rates staying at their recent level (scenarios 1 and 2). The decline would be less pronounced, to 62% in 2031, if participation rates continued to rise at their rate over the last decade (scenarios 3 and 4). 

It is also interesting to note that, under scenarios 1 and 2, the overall participation rate by 2015 would fall below the lowest level observed since 1981 (64% in 1982). This time-line would be pushed back a decade to 2025 in scenarios 3 and 4.

This inescapable decline in the overall participation rate is mainly due to the aging of the population. This phenomenon arises from the low birth rate of the last three decades and the steady rise in life expectancy, which will be exacerbated as the boomers reach 65 years of age. It is expected that retirements, especially of boomers, will exceed the number of people entering the labour market, even if participation rates continue their upward trend.

The impact of the continued rise in participation rates is significant for the future of the labour force. The contrast between scenarios 2 and 3, which differ only in terms of assumptions about the participation rate, shows that while the overall participation rate inevitably declines, it can be cushioned and even delayed if participation rates continue to grow. Under scenario 3, the decline would not start until 2012 after equalling its an historical high of almost 68%; two out of three Canadians aged 15 years and older then would be in the labour market. After that, the overall participation rate remains about four percentage points higher for the entire projection period than that observed under scenario 2 and would be close to 62% in 2031. 

Finally, note that the various population growth scenarios only marginally affect the future evolution of the overall participation rate. There is little difference between scenarios 1 and 2 and between scenarios 3 and 4, which have common assumptions about participation rates by age but differ in terms of population growth. A rise in the birth rate or higher immigration to Canada has only a minor impact on the overall participation rate in the future and does not stop the downward trend. Population therefore is the driving force of future changes: it is not the solution, at least in the short and medium terms.

Figure 2

Significantly fewer working persons per retiree in 25 years

The number of working persons for each retired senior is important, especially when studying the pressure being exerted on some ‘pay as you go’ public pension and health programs. In all the scenarios, the number of workers per retired person aged 65 or older is cut in half between 2005 and 2031, falling from about five today to slightly more than two in 2031 (Figure 3). In 1981, this ratio was more than five workers per retired senior. These findings also suggest that neither a rise in the birth rate, nor increased immigration, nor even the continued rise in participation rates could reverse the downward trend. Once again, the shift from working to retirement of the large boomer generation and the proportionately fewer number of young people largely explains this phenomenon.

Figure 3

One in five people will be 55 years or older within 15 years

There is another challenge on top of the inevitable drop in the overall partic­ipation rate of the Canadian population: the aging of the workforce. This phenomenon can be measured by the percentage of older workers in the labour force who are close to retirement age (55 years and older). It is expected that the proportion of the labour force aged 55 years and older will reach between 18% and 20% in 2021, about double that observed in the mid-1990s (Figure 4). In other words, about one worker in five in 2021 will be aged 55 or older compared to about one in seven in 2005.

Figure 4

The aging of the labour force would be slightly more pronounced under scenarios 3 and 4, which continue the upward trends in participation rates by age, especially after age 50 years. This is explained by the fact that these scenarios would keep older workers in the workforce longer.

Participation fall in all provinces, but at different rates

Although the drop in the participation rate and the aging of the labour force would occur in all Canadian provinces, the intensity would vary from province to province depending on the trend of population growth and participation rates. For this reason, the national results cannot be generalized to all provinces. Table 2, which presents the labour force and overall participation rates in 2005 and 2031 for each province, shows the range of differences at the provincial level.

Table 2 People in the labour force and participation rates by province in 2005 and four scenarios for 2031

Only three provinces – Ontario, Alberta and British Columbia – will see a larger labour force in 2031 than was the case in 2005. This pattern holds under all four scenarios. These provinces are also the only ones currently experiencing population growth near or above than the Canadian average. In contrast, three of the Atlantic Provinces (Newfoundland and Labrador, Nova Scotia and New Brunswick) along with Saskatchewan, would have a smaller labour force in 2031 than in 2005 under all of the scenarios. The labour force could be either lower or higher, depending on the scenario, in Prince Edward Island, Quebec and Manitoba.

The overall participation rate falls between 2005 and 2031 in all provinces, under all scenarios. Scenarios 1 and 2 would result in the lowest levels in 2031, at about 45%, in Newfoundland and Labrador, suggesting that more than one person in two aged 15 years and older would not be in its labour force. In contrast, Alberta in 2031 would see an overall participation rate close to that observed in Canada in 2005 under all scenarios. 

Conclusion

The labour force projections in this article reveal a number of emerging trends. The most important is the inevitable decline in the overall labour force participation rate occurring in Canada and in all provinces. This trend also has been noted in other industrialized countries such as Germany³ and the United States.⁴ This projected decline is a consequence of the low birth rate and aging of the population, which will be exacerbated as the boomers reach retirement age. A rise in the birth rate or in immigration would have only a marginal impact on the evolution of the overall participation rate in both the short and medium terms.

The second finding is that a continued increase in the participation rate of older people has the potential to delay by a few years the decline in the overall participation rate. This outcome would give Canada the possibility to take advantage of a “window of opportunity” for several years. It could exploit an historically high participation rate to develop the means to prepare society for a drop in labour force participation and the aging of the population.

The third finding is that the rapid aging of the labour force will continue to impact the labour market at least until the early 2020s. This represents a major challenge for employers in terms of managing and renewing their labour force. The increased number of older workers could also affect labour productivity in the future.

In every scenario, there is no question that the expected slowdown in labour force growth will have numerous consequences for the Canadian economy and society. Adjustments will probably have to be made to ensure the continuation of current pension and health plans, since the smaller labour force will impact not only the ratio of contributors/beneficiaries, but also the amount of government tax revenue. It will also have an effect on the potential growth of the economy, which depends essentially on two factors: the share of the population working and productivity. This article shows that future economic growth will have to rely less on population and more on higher productivity, which could offset the consequences of a slowdown or even decline in the labour force. The trend in the labour force should be closely studied if Canada wants to meet the challenges of an aging society while ensuring its economic prosperity.

Appendix 1  Population scenarios

The three population growth scenarios used were taken from the most recent Population Projections for Canada, Provinces and Territories, 2005-2031, published by Statistics Canada in 2005⁵. Table A.1 provides a brief summary of the birth rate, mortality and immigration assumptions of these scenarios for Canada.

Table A.1 Scenarios used for population growth

Although they produce different results for the course of the working age population in Canada, all of these demographic scenarios show that the proportion of the working age population in the total population will fall over the next 20 years from approximately 70% today to about 62% in the 2030s (Figure A.1). The pool of potential workers will begin to decline in 2011 as a result of the rapid increase in the number of people leaving this group, since, in that year, the first boomers will reach age 65 years. The fact is that the boomers will not be replaced by subsequent generations due to three decades of low birth rates in Canada. The different levels of immigration built into the scenarios have little impact on future trends, clearly showing that higher immigration cannot prevent a drop in the working‑age population.

Figure A.1

Assuming little or no change in participation rates by age group, the substantial decrease over the next 20 years in the proportion of working‑age people in the total population will lead to a decline in the overall participation rate.

Figure A.2

All of the projection scenarios also lead to the continued rapid aging of the working age population, with the proportion of individuals between ages 55 and 64 rising from 16% in 2006 to 22% in 2021 (Figure A.2). At that time, at least one potential worker in five will be between the ages of 55 and 64 years in Canada.

Appendix 2  Participation rate scenarios

Two assumptions about future participation rates were developed for these labour force projections. The first assumption maintains the participation rates by age, sex and province observed in 2005 constant throughout the projection period. This assumption yields a picture of the future of the labour force if the recent trend in participation should continue in the next few decades.

The second assumption projects a continuation of the upward trends observed since 1996 for another few years. The projection of participation rates for men and for women was calculated separately.

More specifically, the participation rates by age group for men were pro­jected linearly until 2011 using the trends observed over the past decade. This reference period (1996-2005) was chosen to take into account recent increases in participation by men aged between 15 and 24 years and those 50 years or older (Figure A.3). The partic­ipation rates achieved in 2011 were then kept constant for the remainder of the projection period to reflect the fact that they cannot be expected to exceed a certain level.

Figure A.3

Among women, partic­ipation rates have been steadily increasing for most age groups since the 1970s (Figure A.4). Recently, the participation rate of young women less than age 30 has been close – and even higher for teenage women – to than that of men. This suggests that the shape of the participation curve of women by age could be similar to that of men in the near future, although at a slightly lower level. We also incorporate an increase in the participation of women aged 50 years and older, as is also the case among men.

Figure A.4

To reflect the different evolution in female participation rates over the past three decades and the fact that it is likely that the participation of women in the labour market will increasingly resemble that of men in the future, we projected the ratio of female participation rates to male rates by age group and by province. The trend observed in these ratios between 1976 and 2005 was then extrapolated to 2021. The method of extrapolating these ratios by age and by province differs somewhat, depending on the age group so that it fits as closely as possible with the trends observed in the past three decades. The participation rates projected for women for the 2006‑2021 period were then obtained by multiplying these ratios by the rates already projected for men. After 2021, the participation rates for women were kept constant for the remainder of the projection period.

Table A.2 compares the projected participation rates based on these two scenarios to those projected by the Chief Actuary of Canada in his 21st Actuarial Report supplementing the Actuarial Report on the Canada Pension Plan. We see that the participation rates under the “rising rate” assumption are very close for most age groups to those projected by the Chief Actuary. The participation projected by the latter for the 15 to 19 age group and the over 60 years group is slightly lower, suggesting that the “rising rate” assumption developed in this study is a slightly more favorable projection  of future participation in Canada.

Table A.2 Participation rates by age and sex projected for 2031 by Statistics Canada and the Chief Actuary of Canada

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Notes