Housing costs and skills shortages threaten Cyprus’ labour market outlook

Cyprus’ reliance on foreign workers grows as unemployment falls Cyprus’ unemployment rate fell to a historic low of 3.6 per cent in the second quarter of 2026, but demographic changes, housing costs and skills shortages could increasingly constrain the labour market and the economy’s longer-term growth prospects, according to a report by the Central Bank of Cyprus (CBC). “The labour market is a key indicator of an economy’s resilience and prospects, as it is closely linked to growth, productivity and social welfare,” said Marios Polemidiotis, a member of the CBC’s Economic Analysis and Monetary Policy Division. In the CBC’s October 2026 Economic Brief, Polemidiotis said Cyprus had maintained a resilient labour market despite successive external shocks since the pandemic, including the energy crisis, inflationary pressures, tighter financial conditions and persistent geopolitical uncertainty. “Unemployment declined to a historic low of 3.6 per cent of the labour force in the second quarter of 2026, employment continues to expand, inflows of foreign workers remain significant, and labour force participation among Cypriots has been maintained at high levels,” he said. However, the analysis warned that the scope for increasing employment through the mobilisation of unused labour resources was becoming more limited, making productivity gains increasingly important for future growth. “Sustaining economic growth is becoming increasingly dependent on continued employment growth and improvements in labour productivity,” Polemidiotis said. The labour market’s resilience has been supported by the structure of the economy, strong demand for workers, international investment and the adaptability of labour market institutions. “Tourism, professional services, information technology, financial services, shipping, as well as healthcare and education services have continued to generate substantial demand for labour,” he said, noting that these sectors account for almost 80 per cent of total employment. Despite the temporary effects of the pandemic, the sectors had demonstrated considerable adaptability and recovered relatively quickly. Continued foreign investment and the establishment of international companies have also supported job creation, particularly in technology, including financial technology and gaming, investment firms and other professional services. These businesses have created employment opportunities for highly qualified professionals as well as support personnel, while policies to attract both highly skilled and lower-skilled workers from European Union member states and third countries have helped businesses respond to rising demand. “The ability to draw on labour from other European Union member states as well as third countries has enabled businesses to respond to increased demand without generating more acute staffing shortages,” Polemidiotis said. The contribution of non-Cypriot workers has grown significantly, with their share of total employment approaching 28 per cent in 2025. Polemidiotis also attributed the labour market’s performance to the economic restructuring that followed the 2013 banking crisis, which shifted activity towards more outward-oriented and higher value-added sectors. “The gradual strengthening and expansion of sectors such as technology, financial services, particularly investment firms, and other professional services contributed to the diversification of the country’s economic base and the creation of new employment opportunities,” he said. Improvements in measures to activate unemployed people, wider training programmes and the modernisation of public employment services also appear to have contributed to the sustained decline in unemployment. The fall in unemployment has coincided with increases in both employment and the overall labour force, while the CBC found little evidence that near-full employment had generated significant economic overheating. “The recent inflationary pressures are primarily attributable to external geopolitical developments,” Polemidiotis said. Inflation eased following the 2022 energy crisis, wage growth moderated compared with the rates recorded during 2023 and economic growth remained positive, although at a slower pace. The CBC said these developments suggested that the labour market’s strength reflected underlying resilience in the Cyprus economy, while highlighting the need to examine more closely the relationship between wages and prices in a forthcoming economic brief. Despite the positive picture, the economy’s reliance on export-oriented services remains a vulnerability. “A major external shock affecting tourism, professional services and the technology sector, including via a negative impact on foreign investment inflows, could lead to a significant slowdown in job creation,” Polemidiotis said. Manufacturing and construction also support employment, but their contribution remains relatively small compared with that of larger euro area economies with extensive industrial sectors. Demographic change presents another major challenge, as population ageing across Europe is expected to limit future growth in Cyprus’ domestic labour force. “As unemployment has already fallen to exceptionally low levels, the scope for increasing employment via the mobilisation of idle labour resources has become considerably more limited,” he said. The employment rate among people aged 55 to 64 has risen significantly and contributed more than any other age group to the overall increase in employment, underlining the growing importance of older workers to labour supply. Cyprus’ dependence on foreign workers also leaves the labour market exposed to changes in international investment and competition among countries seeking to attract skilled professionals. “Any slowdown in migration inflows, combined with sustained strong labour demand, could lead to greater labour supply constraints,” Polemidiotis warned. Housing affordability could further restrict the availability and mobility of workers, with rising costs and a limited supply of residential units potentially discouraging both lower-income Cypriot workers and foreign employees from taking up jobs in particular areas. “These developments could also intensify wage pressures on businesses, either through higher living and housing costs or because of relatively limited labour availability in certain sectors and occupations,” he said. The CBC noted that low unemployment did not necessarily mean workers’ skills matched employers’ requirements, although there was no evidence of widespread skills mismatches. Recent European Commission indicators suggest that labour shortages in services, including tourism, technology and professional services, have largely eased, while pressures remain more pronounced in construction. However, “these shortages do not appear, thus far, to constitute a major constraint on economic activity”, Polemidiotis said. The decline in long-term unemployment provides further evidence of improved labour market functioning, with the rate falling from around 8 per cent in 2014, following the banking crisis and an increase in discouraged workers outside the labour force, to 2 per cent in 2020 and below 1 per cent by late 2025 and early 2026. The combination of favourable employment conditions, falling long-term unemployment and easing inflationary pressures is consistent with the possibility that the non-accelerating inflation rate of unemployment (NAIRU), the unemployment level associated with stable inflation, may be lower than in the past. Polemidiotis said prolonged unemployment could erode skills and weaken people’s connection to the labour market, potentially raising structural unemployment. Looking ahead, “future growth will no longer be able to rely primarily on rises in the number of workers but will instead depend increasingly on gains in labour productivity”, he said. The CBC said policy should focus on increasing participation among women, older workers and young people, including through more affordable childcare, flexible working arrangements, stronger parental leave provisions and expanded apprenticeships, internships and vocational training. “The development of human capital and the improvement of labour market matching represent important policy priorities,” Polemidiotis said. The analysis also called for stronger science, technology, engineering and mathematics skills, digital capabilities and artificial intelligence competencies, alongside training tailored to employers’ needs, faster recognition of professional qualifications and digital tools to connect jobseekers with vacancies. Maintaining a flexible economic migration framework, simplifying procedures and targeting recruitment in occupations experiencing high demand were also identified as priorities. What is more, Polemidiotis said improving housing availability and affordability could help make Cyprus more attractive to skilled workers and improve the functioning of the labour market. “Policies that strengthen labour force participation, skills development, the efficient functioning of the labour market and labour productivity can contribute to maintaining favourable employment conditions and support the long-term growth potential of the Cyprus economy,” he concluded.