Is it feasible to increase income and generate employment in the context of a traditional labour intensive rural industry with strong linkages to an agriculturally backward economy? In order to address this issue, primary data from four villages of Peruvian North Sierra was used. The case of the hat making activity, employing exclusively family labour, purchasing the main input (straw, paja de palma) from Ecuador, and with consumers concentrated on villages and small towns, was investigated. The analysis was made at the market level. Considering the context of a self-employment activity, a theoretical framework was developed to explain the determinants of labour demand, input demand, hat output and labour return. Demand and supply constraints to the expansion of hat making activity were found. Important differences in the value of labour marginal product across the sample were identified. These were mainly associated with the use of varied input quality. Growth based on local demand would not be viable given falls in consumer incomes - mainly farmers - and expected changes in consumer preferences; therefore the growth motor would rest more in market expansion and product diversification to urban consumers.