Compensation Planning in a Softening Labour Market

What Canadian Employers Should Expect in 2026

After several years of intense hiring competition, rising wages, and acute talent shortages, signs point to a softening labour market across Canada. While unemployment remains historically low by long-term standards, recent labour force data shows a noticeable shift. According to Statistics Canada, the national unemployment rate has trended upward through 2024 and 2025 as employment growth slows and population growth accelerates. The federal government has also noted that wage growth, while still positive, has moderated from the peak levels seen during the post-pandemic recovery.

This change in labour market conditions is shaping how employers think about salary budgets, pay pressures, and retention strategies heading into 2026.

A Cooling Labour Market — But Not a Weak One

Canada continues to add jobs, but at a slower pace. Statistics Canada reports that the number of job vacancies has fallen significantly compared to the highs of 2022 and early 2023. At the same time, the Bank of Canada has emphasized that labour market conditions are easing as demand for workers aligns more closely with supply.

These trends are being felt unevenly across sectors. Some industries such as healthcare, skilled trades, and technology continue to report difficulty filling critical roles, while others are experiencing slower hiring, more stable turnover, and fewer counter-offers than in recent years.

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What This Means for Compensation Planning

With inflation stabilizing and wage growth easing, many Canadian organizations are taking a more measured approach to compensation planning for the year ahead. Several themes are emerging:

1. Salary Increase Budgets Are Becoming More Moderate

Government economic indicators suggest that cost pressures are easing, and many employers are preparing for smaller salary increase budgets in 2026 than in the peak inflation years. But pay pressure hasn’t disappeared. Employees still expect increases that keep pace with rising costs of living, and competitive pay remains essential to retention.

2. Internal Equity and Compression Issues Remain

Government economic indicators suggest that cost pressures are easing, and many employers are preparing for smaller salary increase budgets in 2026 than in the peak inflation years. But pay pressure hasn’t disappeared. Employees still expect increases that keep pace with rising costs of living, and competitive pay remains essential to retention.

3. Hiring Is Slowing, but Key Roles Still Command Premiums

Although job vacancies have declined nationwide, the federal government continues to highlight persistent shortages in specific occupations, especially in skilled trades, healthcare, and technical roles. For these positions, employers are still competing intensely meaning differentiated pay strategies remain necessary.

4. Retention Strategies Are Evolving

Lower turnover doesn’t mean turnover risk has disappeared. Employers are increasingly focusing on:
    • Career development and internal mobility
    • Strengthening compensation governance
    • More structured guidelines for promotions and pay adjustments
    • Selective use of market or “hot skills” premiums
The shift in the labour market allows organizations to refocus on consistency, fairness, and sustainable pay practices, rather than reactive wage increases.

Looking Ahead

Canada’s labour market is not returning to pre-pandemic conditions, it is moving into a new phase marked by slower hiring, stronger labour supply growth, and more predictable wage patterns. For HR and compensation leaders, this creates both challenges and opportunities: maintaining competitiveness while exercising financial discipline, strengthening internal equity, and adopting more intentional compensation practices.

WCBC’s Upcoming Research Project

To help employers plan for the year ahead, WCBC is launching a national research project in January 2026 examining how Canadian organizations are adapting their compensation practices in a softening labour market. The study will explore key issues such as:

    • Planned salary increase budgets
    • Shifts in hiring conditions and starting pay
    • Approaches to off-cycle adjustments
    • Managing internal equity and compression
    • Evolving retention strategies
    • Differential pay practices for critical roles

By participating, organizations will gain access to timely, evidence-based benchmarks that support effective salary planning, budgeting discipline, and compensation governance. WCBC’s January 2026 research project will provide the strategic insight employers need to navigate this new phase of the labour market with confidence.

To be notified when the project launches, and to receive ongoing WCBC research updates, insights, and news, organizations can subscribe through our website.

How Can WCBC Help?

At WCBC, we specialize in providing tailored compensation and benefits solutions that align with your organization’s goals and workforce needs. Contact us to learn how we can help you achieve your compensation & benefit goals.

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