This research focuses on the effect of decoupled payments on labour supply of Dutch dairy farmers. Data availability leads to the fact that we can not estimate structural labour supply equations. We show how to derive reduced form equations suitable for policy simulations. We use the panel data sample selection estimation approach Wooldridge (1995) to estimate the off-farm labour supply equation. This method is based on Mundlak's (1978) linear panel data estimation approach, which we use to estimate the on-farm labour supply equations. Even though, simulations show a significant negative effect of decoupled payments on labour supply, the economic significance of this effect is very limited.