Sources said a former RAF wing commander and the head of a children’s hospice were chosen by the party’s executive.
A selection meeting will be held by local party officials today to decide who will stand for Labour in the by-election on November 29.
Former Labour Minister Mr MacShane quit as an MP earlier this month after he wrongfully claimed at least £7,500 in expenses.
The two women chosen by Labour’s executive are Sophy Gardner, who now runs her own communications consultancy, and Sarah Champion, the chief executive of the Bluebell Wood children’s hospice in Yorkshire.
Before launching her own company, Ms Gardner had a 19-year career in the RAF during which she served in Iraq and Afghanistan. She was also in charge of RAF transport and refuelling assets during the 9/11 terrorist attacks and Afghanistan operations 2001-2, for which she was awarded the MBE.
Before taking the role at Bluebell Wood in 2008, Ms Champion was chief executive of the Chinese Arts Centre in Manchester for 12 years.
A Labour source said: “This is a clean break by-election. It is important we have the best possible candidate to deal with the exceptional circumstances in which this by-election is taking place.”
Simon Wilson, a head of business for a UK firm and a governor at a local Normanton primary school, was last night selected as the Conservative candidate for the by-election.
In a letter to the Yorkshire Post last week, Mr MacShane, who quit his Rotherham seat rather than face a 12-month suspension from the House, apologised to the people of Rotherham for his “stupid” actions.