<p>Improving the income distribution structure by increasing the labor income share is a key approach for China to achieve high-quality economic development. Using data from Chinese A-share listed companies between 2003 and 2022, we investigate the impact of government innovation subsidies on labor income share by employing fixed effects models, instrumental variable methods, and Heckman’s two-stage approach. The results show that government innovation subsidies contribute to increasing the share of labor income in enterprises. However, there exists an optimal threshold beyond which subsidies may hinder the share of labor income, revealing an inverted U-shaped relationship between the two variables. Government innovation subsidies improve the factor structure, promote digital transformation in enterprises, and reduce costs, thus increasing the share of labor income. The stimulating effect of government innovation subsidies on labor income share is more significant in manufacturing, private enterprises, labor-intensive industries, and sectors with low human capital. Further investigation confirms that a higher share of labor income is beneficial for improving corporate performance. This paper not only provides insights for improving labor income share from the microenterprise perspective but also offers new ideas for optimizing China’s current innovation subsidy policies.</p>