Employment diversification is a major livelihood strategy in rural areas and is thus a focal point of the ongoing rural development debate. The issue of non-farm diversification is undoubtedly complex and its determinants are difficult to identify. Increasingly, there is a need to address, clarify and bring together theoretical concepts for analysing non-farm rural employment (NFRE). With this in mind, the objective of this paper is to summarize and link existing theories and to introduce some new aspects with regard to modelling NFRE and employment diversification. NFRE dynamics are closely interrelated with the institutional framework and its incentives and constraints. The behaviour of rural decision-makers also depends on fundamental determinants such as norms and attitudes. The Sustainable Livelihood Framework (SLF) and the demand-pull and distress-push concept focus on the motives and the context in which diversification strategies evolve. To depict economic incentives we will introduce a welfare model which explains the labour allocation processes. We will show that benefits do not only arise for demand-pull shifters, who take up better paid non-farm employment, but also for distress-push shifters, whose incentive to engage in low-paid non-farm activities is to raise aggregate household income. Finally, the decision-making process itself will form the focus of a behaviour model. It also follows the logic of rational choice and can be integrated into the discussion of a synthesis of concepts for the analysis of NFRE. This, in turn, is meant to provide the basis for future empirical research, as well as serve as a thought-provoking impulse for policy makers.