This paper evaluates how efficiently farm households allocate labor between farm and off-farm activities. It estimates farm and off-farm labor supply functions to determine the factors that influence labor allocation. Both the shadow wage and the off-farm wage rate are included as regressors in the supply functions. The study reveals that, on average, farm households are inefficient, but when linked to labor markets their productivity and internal efficiency increase. The decision to sell labor is influenced by location, and off-farm employment is difficult to find, particularly for the better educated. Interventions should aim to increase opportunities for off-farm employment for persons with skills or with higher than the basic level of education, and to reduce the cost of participating in labor markets, for example by improving rural infrastructure. Addressing failures in rural financial markets would save poor households from having to sell their labor for less than they get from their farms.