This paper examines the relationship between rural non-farm employment and household welfare using nationally representative data from Madagascar. It focuses on labor outcomes in the context of household livelihood strategies that include farm and non-farm income earning opportunities. It identifies distinct household livelihood strategies that can be ordered in welfare terms, and estimates multinomial logit models to assess the extent of the barriers to choosing dominant strategies. It finds that high-return non-farm activities provide an important pathway out of poverty, but that barriers such as lack of (a) education, (b) formal credit and (c) access to telecommunications restrict participation in such activities. Individual employment choice models and estimates of earnings functions provide supporting evidence of these barriers. Although the poverty reduction effects may be limited, low-return non-farm activities also play an important role as safety nets by providing opportunities for ex ante risk reduction and ex post coping with shocks.