Increasing the share of labor income is an important way to achieve common prosperity. This paper uses manually collected urban-level household registration system reform data and China’s industrial enterprise database, and uses progressive household registration system reform as a “quasi-experiment” to evaluate the causal relationship between labor market reforms and labor income shares. The study found that the labor market reform significantly increased the labor income share. The heterogeneity effect shows that this positive effect is stronger in high-innovation enterprises, low-financing-constrained enterprises, non-state-owned enterprises, small-scale enterprises, labor-intensive enterprises, and enterprises in developed regions. The mechanism test found that the labor market reform has significantly increased the per capita salary, the number of employees, and the performance of the enterprise, thereby increasing the labor income share. The research in this article has enlightening significance for the current realization of common prosperity.