The economy can handle— indeed needs—higher interest rates. And given the unsustainable strength of housing activity, moderation in housing would be healthy. But high household debt and elevated house prices are vulnerabilities. If the economy slowed sharply and unemployment rose considerably, the combination of more highly indebted Canadians and high house prices could amplify the downturn.
So, from a cyclical perspective, the labour market has proved to be quite flexible and things have worked reasonably well. A more open question is the degree of flexibility in dealing with structural change.