This study provides evidence on factors that influence household labor allocation decisions and demand for farm labor in Uganda. We estimated a monthly panel data to deal with potential heterogeneity or individual effect and tested for violation of the random effects modeling assumption that the explanatory variables are orthogonal to the unit effects. In addition, we estimated a random effects tobit model that involve explained variables with corner solutions. The results show that exogenous income did not affect off-farm labor supply by liquidity constrained households while liquidity unconstrained households increased the amount of labor supplied to off-farm activities and the amount of labor hired in. Farm size and education of household head improved labor productivity on farm and hence the amount of labor hired. Road proximity improved both the hiring in and out of labor. The household being male headed improved the work hours in the nonagricultural off-farm activities. The findings imply that direct payments such as input provision to the poor may not improve labor employment unless backed with policies that remove bottlenecks and improve opportunities in the labor market. Instead, investment in micro credit institutions, road infrastructure, and education suited to smallholder production needs and policies that improve gender balance in terms of access to productive resources could help alleviate bottlenecks in labor markets and improve resource allocation between farm and off-farm sectors.

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