The labor productivity gap and differentials within and between farm and non-farm sectors is the key to understanding household income diversification patterns. This study shows that the labor productivity gap between farm and non-farm sectors attenuates after controlling for labor intensity. Within agriculture, there are no productivity gaps between staple and high value crops. This provides some evidence of underemployment in agriculture and employment gaps between the farm and non-farm sectors. In addition, diversification into and within farm and non-farm sectors is positively correlated with labor productivity in the specific sector. Diversification into non-farm activities may, however, reduce farm labor productivity and requires policies that reduce such tradeoffs in the transformation process. In addition, the pathways linking income diversification and labor productivity are complex and non-linear. In Uganda, income diversification is higher among resource-poor households (with limited family labor, land, and livestock) in rural areas away from main roads or urban centers. In Nigeria, diversification is higher for male-headed households with productive assets (family labor and land) and in areas closer to markets and urban centers.