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. The case of Cyprus is of particular interest, as the labour market has remained remarkably resilient despite successive external shocks since the pandemic, including the energy crisis, inflationary pressures, tighter financial conditions and persistently elevated geopolitical uncertainty. Unemployment declined to a historic low of 3,6% of the labour force in 2026Q2, employment continues to expand, inflows of foreign workers remain significant, and labour force participation among Cypriots has been maintained at high levels.
Monitoring developments in the labour market is particularly important. On the one hand, a resilient labour market strengthens the economy’s ability to absorb external shocks and support domestic demand. On the other, under conditions of near full employment, such as those currently prevailing in the Cypriot labour market, issues related to labour availability, skills adequacy and productivity are becoming increasingly important for the economy’s growth prospects. As illustrated in Chart 1, sustaining economic growth is becoming increasingly dependent on continued employment growth and improvements in labour productivity.
1. Why has the labour market in Cyprus remained so resilient despite successive external shocks since the pandemic?
The resilience of the labour market in Cyprus is the result of the interaction of several factors linked to the structure of the economy, the dynamics of labour demand, the establishment of international companies, which has strengthened the supply of skilled labour through the attraction of highly qualified professionals from abroad, as well as the adaptability of labour market institutions.
A key role is attributed to the strong performance of labour-intensive service sectors, which account for almost 80% of total employment. Tourism, professional services, information technology, financial services, shipping, as well as healthcare and education services have continued to generate substantial demand for labour. Despite the temporary effects of the pandemic, these sectors demonstrated considerable adaptability and recovered relatively quickly.
At the same time, continued foreign investment inflows and the establishment of international companies in Cyprus have materially supported labour demand. In particular, the technology sector (including fintech, gaming, etc.), financial services (especially investment firms), and other professional services have created a substantial number of new jobs for both highly skilled and support personnel.
Furthermore, the implementation of policies aimed at attracting workers from abroad, both highly skilled and lower-skilled, has contributed to supporting economic activity and alleviating pressures arising from labour shortages in selected sectors. 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. Chart 2 illustrates the growing contribution of non-Cypriot workers in meeting rising labour demand, with their share in total employment increasing significantly in recent years and approaching 28% in 2025.
The economic restructuring that followed the 2013 banking crisis contributed to a shift in economic activity towards more outward-oriented and higher value-added sectors, while also strengthening the functioning of the labour market. Specifically, as previously noted, 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.
Finally, the gradual improvement of mechanisms aimed at activating the unemployed, the expansion of training programmes, and the modernisation of public employment services appear to have supported the steady decline in unemployment.
It is worth noting that the decline in unemployment was accompanied by increases in both employment and the labour force. Furthermore, the near full-employment conditions currently prevailing in Cyprus do not appear to be associated with strong signs of economic overheating and the recent inflationary pressures are primarily attributable to external geopolitical developments.
Specifically, the maintenance of unemployment at exceptionally low levels coincided with the easing of inflation pressures following the 2022 energy crisis, more moderate wage growth compared with the rates recorded over 2023, and the continuation of positive, albeit softer, economic growth rates (Chart 3). These developments suggest that the favourable performance of the labour market reflects, to a significant extent, the structural strength and resilience of the Cyprus economy. Consequently, developments in the labour market underline the importance of continuously monitoring the factors affecting economic activity and employment conditions, also highlighting the need to better understand the interactions between wages and prices, which will be examined in greater detail in a forthcoming CBC Economic Brief.
2. What are the main challenges to maintaining labour market resilience?
Despite the current positive picture, the Cypriot labour market faces several medium- and long-term challenges.
One of the most significant challenges relates to the economy’s relatively high dependence on specific export-oriented service sectors that are highly exposed to foreign demand. 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. Although the manufacturing and construction sectors support the labour market, their contribution remains comparatively small relative to larger euro area economies with extensive industrial sectors.
A second, and fundamentally structural, challenge concerns demographic developments. Population ageing, a phenomenon affecting Europe overall, is expected to contain future growth in the 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. Chart 4 illustrates the significant increase in the employment rate of the 55-64 age group, which has contributed more than any other age group to the overall rise in employment. This development highlights the importance of labour market participation among older age groups, as labour supply may face increasing constraints in the years ahead.
The significant contribution of foreign workers to meeting the economy’s labour needs suggests that future labour supply may be influenced by developments in both the international and domestic environment. In particular, changes in investment flows or increased competition among countries to attract skilled labour could affect labour availability in Cyprus. Consequently, any slowdown in migration inflows, combined with sustained strong labour demand, could lead to greater labour supply constraints.
In addition, rising housing costs and the contained supply of residential units may act as a disincentive both for lower-income Cypriot workers and for foreign workers, thereby negatively affecting labour mobility and workforce availability. 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.
Low unemployment does not preclude the existence of significant skills mismatches in the labour market. Although there is no data of widespread skills mismatches, shortages have been identified in specific occupations, based on assessments by local economic and social partners and findings from European Commission (EC) surveys. Indeed, the latest EC indicators suggest that labour shortages in services (including tourism, technology and professional services) have largely eased, while shortages remain more pronounced in the construction sector. However, these shortages do not appear, thus far, to constitute a major constraint on economic activity. In fact, the gradual decline in long-term unemployment provides evidence that labour shortages are not materially constraining economic activity and that labour market functioning has improved. The long-term unemployment rate fell from around 8% in 2014, immediately following the banking crisis and the increase in discouraged workers outside the labour force, to 2% in 2020 and to below 1% by the end of 2025 and the beginning of 2026, approaching levels observed before the restructuring of the banking sector (Chart 5). Overall, the particularly favourable labour market conditions and the marked decline in long-term unemployment, alongside the gradual easing of inflationary pressures, are consistent with the assessment that the Non-Accelerating Inflation Rate of Unemployment (NAIRU) may be lower than in the past. The reduction in long-term unemployment is especially important, as prolonged unemployment can raise the structural unemployment rate (NAIRU) through skills erosion and detachment from the labour market.
Finally, productivity is expected to become increasingly important over the long term. As the economy approaches full-employment conditions, 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, as noted earlier (Chart 1).
3. Policy Issues for Maintaining Favourable Labour Market Conditions
Maintaining favourable labour market conditions in Cyprus requires the continuation of policies that strengthen both labour supply and the economy’s ability to adapt to potential adverse external shocks. Attention could be given to further increasing the participation of women, older workers and young people via measures such as improving access to affordable childcare services, promoting flexible forms of work, strengthening parental leave arrangements, and expanding apprenticeship, internship and vocational training programmes.
At the same time, the development of human capital and the improvement of labour market matching represent important policy priorities. Relevant measures include policies aimed at strengthening STEM skills, digital skills and artificial intelligence competencies, training programmes tailored to labour market needs, faster recognition of professional qualifications, and the use of digital matching tools to connect workers with job vacancies. These measures can help address skills shortages and support productivity growth.
In addition, maintaining a flexible economic migration framework, with a continued focus on simplifying procedures and the targeted attraction of workers in high-demand occupations, can support an adequate labour supply amid the ongoing diversification of the economy’s productive base within the services sector. Finally, improving the availability and affordability of housing can enhance the country’s attractiveness for skilled workers. In this context, the continuation and expansion of policies that support an increase in housing supply could contribute positively to the functioning of the labour market.
4. Concluding Remarks
The Cypriot labour market has demonstrated remarkable resilience in recent years, despite the particularly challenging conditions prevailing in the external environment. At the same time, demographic developments, evolving skill requirements and the growing importance of productivity are expected to increasingly shape future labour market outcomes. In this context, 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.
[1] Marios Polemidiotis, Senior Officer, Head of Macroeconomic Analysis and Forecasting Section of Economic Analysis and Monetary Policy Division. I would like to thank Maria Papageorghiou for constructive comments and Charis Charalambous for the preparation of the Charts. The views expressed in this Economic Brief are solely those of the author and do not necessarily reflect those of the Central Bank of Cyprus or the Eurosystem. The author bears sole responsibility for any errors or omissions.