Drawing on research from southern Ethiopia this article presents evidence that non-farm and off-farm activities are carried out by a significant proportion of adults and make an important contribution to livelihoods. It shows that there is a high involvement of women in diversification and that the contribution of diversification activities to cash incomes is particularly important for poorer households. The single most important activity is trading, while labouring for others is also important. The paper also shows the need for greater historical depth in the understanding of livelihood diversification. In highland Wolayta non-farm activities (particularly trading and labouring for others) have a long history. In the case of the latter people worked as labourers as part of a set of arrangements that enabled them to gain access to key resources. These arrangements were deeply embedded in complex social relations. As these institutional arrangements have changed, so ‘diversification activities’ have become more visible. Consideration of the historical and social contexts is thus critical for a firm understanding of livelihood change and the changing role and importance of diversification activities. Copyright © 2002 John Wiley & Sons, Ltd.