Using data from the Canadian Survey of Labour and Income Dynamics (SLID) for the period 1993-1996, we examine patterns and determinants of labour force transitions of adequately employed and underemployed workers in an attempt to explore whether employment dynamics significantly differ between rural and urban workers so as to disadvantage rural economic performance. The results indicate that rural underemployed workers in Canada are, in the short run (year-to-year transitions) equally likely to enter adequate employment as adequately employed individuals are to enter underemployment. Further, we also found there is weak evidence that education level of rural workers has a lower impact on the probability of moving out of underemployment than in urban areas. In addition rural women are significantly less likely than their male cunterparts and urban workers to enter adeequate employment although the presence of young children does not seem to especially constrain rural women's employment. The results suggest that labour force transition in and out of adequate employment, and particularly underemployment, significantly differ between rural and urban workers and should be taken into account when evaluating employment hardship in rural Canada.