This article explores the relationship between land size and productivity in the livestock sector. Household panel data from pastoral areas in northwestern China were analysed. Results suggest an inverse relationship (IR) between land size and the number of livestock per ha. IR can be largely explained by labour input intensity, which is negatively correlated with land size. We find that household’s labour demand is not separable from household’s labour supply and households’ decisions to rent land and hire labour for grazing are significantly related to the labour–land endowment ratio. These findings are consistent with the Chayanovian explanation that labour input intensity varies with farm size due to unobserved interhousehold variation in shadow wage rates. In addition, participation in the labour market does not significantly influence the IR for the employer, while the practice of land renting reduces, but does not eliminate, the IR for the lease. These findings point towards the potential for using factor markets to optimise pasture-based livestock production scale, and the need to promote the factor market development to achieve efficiency in resource use.