<p>Existing research has devoted significant efforts to understanding how to incentivize universities to pursue the third mission, including non-economic factors such as the external environment of universities, institutional characteristics, and researcher traits, as well as economic incentives. However, from an economic perspective, the literature tends to focus on the effects of economic incentives on academic commercialization, while little attention has been paid to how university funding management practices influence another form of academic engagement—university-industry collaboration (UIC). Our study specifically investigated the impact of labor costs on UIC within Chinese universities. We analyzed the data from 64 universities directly under the Ministry of Education of China from 2008 to 2017. The results derived from the GMM estimation model demonstrated a significant positive correlation between the labor cost proportions and UIC. However, the ratio of faculty to graduate students involved in research projects negatively moderates this relationship. Heterogeneity tests indicated that the teacher-student ratio in basic research projects has a negative moderating effect on the relationship between labor costs and UIC, whereas its moderating role is positive but not significant in applied research and experimental development projects. Our study illuminated the indirect economic incentives that drove universities to pursue their third mission, which can enrich the literature on the determinants of academic engagement and provide valuable practical insights for promoting UIC.</p>