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This study is concerned with assessing the contribution of the EU’s Common Agricultural Policy (CAP) to non-farm employment in the UK, through its direct and indirect effects on agriculture, up- and downstream industries, and the diversification of rural areas. We employ a micro approach, based on company data from FAME dataset combined with detailed subsidies data from DEFRA. We focus on employment in small and medium enterprises (SMEs) which are central for job creation. As a theoretical framework for our empirical firm employment function we employ a monopolistic competition model with delays in adjustment in prices, employment, and capacity. The generalised method of moments (GMM) is used to estimate the effect of CAP payments on both the level and growth of employment. Our estimation results suggest positive spillovers of CAP payments to non-farm employment. Although the magnitude of the effects is small, it is economically significant especially for the rural labour market.


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