This study uses aggregated municipality data, for the years 2001–2009, to explore whether direct payments to farmers affect agricultural employment in Swedish municipalities. The decoupling reform in 2005 included a new grassland support payment accompanied by management obligations that had unexpectedly high redistributive consequences as it greatly increased common agricultural policy payments to municipalities with large areas of grassland. In some municipalities, total payments more than doubled. Thus, since the reform seems exogenous to the behaviour of farmers and the regional economy, the reform can be used to identify a subsidy effect.

We find that a permanent increase in agricultural employment can be attributed to the new grassland support. Our results indicate that the grassland support generates an additional job at a cost of SEK 250,000, relative to the average agricultural wage of SEK 333,000. However, the subsidy effect is largely keeping jobs in agriculture, i.e. the grassland support may be slowing down the process of structural change in grassland regions.