This paper examines the conundrum of labor shortage in a surplus labour agriculture sector of Nepal. The research question focuses on whether labor market failure contributes to this puzzle and to what extent. Using the Household Separation framework, the study examines the seasonal and regional dynamics of the labor market. The main results demonstrate that despite the overall surplus labor in the rural economy, labor shortages can exist in specific agricultural seasons and regions due to spatially segregated labor markets. The inter-rural labor movement seems to mitigate the issue of labour shortage though such movement has caste dynamics to it. The findings highlight the importance of addressing labor market failures and regional disparities in tackling labor shortages in Nepal’s agriculture.