This paper presents a model of the farm labor allocation decision based on risk and return characteristics of different activities. It is shown that off-farm employment can play an important role in the diversification of farm family income, implying that portfolio models of risk and return to farm activities should take into account the possibility of off-farm employment. A model of the labor allocation decision based on the risk and return characteristics of each activity is developed and tested using a state level cross section of the United States over the post-war period, and performs well in explaining variation in reliance on off-farm income.