Canada’s shrinking workforce puts technology and productivity in the spotlight

Canada has entered a demographic transition with consequences extending from house prices and healthcare to labour shortages, technological investment and economic growth. In a new analysis, the Bank of Canada argues that the combination of an ageing population and declining immigration is beginning to change the country’s economic fundamentals. Population growth slowed to 0.5 percent in 2025, according to the Bank, its lowest rate in more than a century.

The central bank’s argument is that fewer newcomers combined with the retirement of the baby-boom generation means fewer workers, weaker growth in demand and ultimately less productive capacity. Immigration consequently occupies an interesting economic position: newcomers increase demand, particularly for housing, but also expand the labour force and the amount that the economy can produce.

This is a useful account, particularly in explaining why demographic change matters to monetary policy. Yet there is an important limitation. A smaller workforce does not automatically mean a proportionately smaller economy. How much Canada produces depends not simply on the number of people working, but also on how productive each worker becomes. This is where technology moves from the sidelines to the centre of the demographic story.

Immigration has played a particularly important role in Canada’s population story because the country’s birth rate has been below replacement level for more than 50 years. During most of the past half-century, population expanded by about 1.2 percent annually, before accelerating to as much as 3 percent a year during the early 2020s. That rapid expansion brought benefits and costs. The Bank notes that it increased the supply of workers and helped alleviate labour shortages, while simultaneously imposing extra pressure on housing and public services.

Following policy changes beginning in 2024, immigration levels began declining, including reductions involving temporary residents. The consequences are therefore two-sided. Less immigration can reduce housing demand, but it also means fewer workers and weaker demand elsewhere in the economy. The Bank handles this trade-off well. It is a considerably more sophisticated position than presenting immigration either as an uncomplicated route to economic growth or simply as a source of additional demand. Where the analysis becomes less satisfying is in treating productive capacity as predominantly a demographic matter.

Can AI make up some of the difference?

Technology offers one possible counterweight. This is particularly striking because the Bank itself discusses the issue separately in its recent analysis of the AI transformation. There it identifies artificial intelligence as a potential general-purpose technology, capable of affecting numerous industries and changing the tasks performed at work. The Bank makes an economically significant observation in that article: if AI improves productivity, the economy could produce more goods and services with the same amount of effort. Higher labour productivity could consequently permit faster economic growth without producing the same inflationary pressure.

Put the Bank’s two analyses together and a more interesting story emerges. An ageing population restricts labour supply at precisely the point when AI, automation and other digital technologies potentially allow individual workers to accomplish more. This does not mean that artificial intelligence will “solve” demographic ageing. The Bank itself stresses that the timing and eventual magnitude of AI-driven productivity gains remain uncertain.

There is also a substantial difference between automating tasks and eliminating whole occupations. The Bank notes that current large language models can undertake a wide variety of tasks but cannot perform many complete jobs, not least because their outputs can be erroneous and require human oversight and judgement. For an ageing economy, however, that distinction can be an advantage. The economically useful model need not be mass replacement of humans. It could instead be augmentation, allowing fewer workers to handle repetitive activities faster while concentrating human expertise on planning, analysis and other higher-value tasks.

Ageing also changes where Canada’s resources need to go. The Bank observes that older Canadians spend more on healthcare, increasing demand for pharmaceuticals, adaptive-living products and home-care services. Under Canada’s publicly funded healthcare arrangements, this also has implications for spending on hospitals and long-term care and potentially for the tax revenues required to fund those services.

This exposes a difficult economic feedback loop. An ageing society can simultaneously reduce the proportion of working-age people and increase demand for some labour-intensive services. Technology may increase efficiency, but it cannot make every constraint disappear. A digital tool that reduces administration is economically valuable precisely because it can release skilled workers to undertake tasks requiring human expertise. The policy objective therefore needs to become smarter deployment of labour rather than a simplistic contest between humans and machines. The same reasoning extends to agriculture, manufacturing, logistics and professional services. Where workers become scarce, automation becomes potentially more valuable, although the business case will differ dramatically between activities.

Twin transitions

Another weakness with a demographic framing is the risk of making slower economic growth sound unavoidable. The Bank is careful not to go this far. Its remit is also monetary policy rather than setting immigration, industrial or technology policy. It explicitly says that it cannot alter Canada’s demographic trajectory and instead needs to understand how structural changes influence production, demand, growth and inflation in maintaining its 2 percent inflation target.

Economies can respond to labour scarcity through technological investment, better training, redesigned processes and more efficient use of existing skills. Longer working lives and removing barriers that prevent people from participating fully in the labour market can also change the effective supply of labour. These are policy and business choices rather than inevitable demographic outcomes.mCanada therefore faces two transitions rather than one. The first is demographic: slower population growth and an older society. The second is technological: the uneven adoption of AI, automation and digital tools capable of altering how much workers can produce.