<p>With growing migrant workers returning to hometowns, the external impact of returned migrants on local rural residents should be investigated. This study constructs a three-sector economic theoretical model including labor transfer friction and the heterogeneity of individual ability endowment to analyze the impact of returned migrant workers on the income of local rural families. The panel data from the China Labor-force Dynamic Survey of 2014–2018 are used in empirical analysis. Main findings show returned migrants significantly boost local rural families’ non-agricultural wages via skill spillover effect, with limited impact on agricultural income. Heterogeneity analysis reveals that this positive impact is more pronounced among younger and highly educated returnees, as their superior individual endowments facilitate stronger skill spillovers. We further investigate whether returned migrants can reduce income disparities among local rural families and find that the total income of low- and middle-income groups is more significantly enhanced by shifting employment from the agricultural sector to off-farm industries.</p>