Farm households in western Kenya show preference for different labour market participation strategies. This paper examines efficiency in labour allocation between farm and off-farm activities and the factors influencing labour supply. Unlike previous studies where the household decisions are determined by a single wage, this study allowed household decisions to be influenced by both the shadow wage and the off-farm wage. Returns to labour vary within the farm and between household members working off-farm so this heterogeneity was exploited to generate a household specific shadow wage and off-farm wage rate. The results reveal that on average, farm households are not efficient. However participation in the labour markets increases labour use efficiency on the farm. Labour supply to the farm decreases with income and increases with the education level. Supply off-farm depends on the education level and labour capacity. The lack of opportunities or rationing in off-farm employment is a problem for households whose head has more than the basic level of education.