The upgrading of industrial structure has become an important driving force for economic development in the new normal of economic growth. Therefore， the upgrading of industrial structure is an important subject of research. There is plenty of research from the perspective of labor cost， but little can be found on the effect of transaction cost. Furthermore， most of it is general descriptions and qualitative analysis at the system level without a profound systematic probe into the effect of transaction cost at a theoretical level or an empirical study on it. It is therefore necessary to study the impact of the changes in labor cost and transaction cost on the upgrading of industrial structure from both theoretical and empirical perspectives. Theoretical research shows that labor cost and transaction cost influence the upgrading of industrial structure in different ways. Labor-intensive industries or links in the production chain are more sensitive to labor cost. The rise of labor cost will lead to the relocation of these industries or links in the production chain， and contribute to the replacement of labor with capital and technology by local enterprises， resulting in the shift of industrial structure from labor-intensive to capital- and technology-intensive. Knowledgeintensive industries or links in the production chain are more sensitive to transaction cost. Even if the labor cost is high， the low transaction cost will attract these industries or links in the production chain， thus increasing the proportion of local knowledgeintensive industries or links in the production chain. As a result， the increase of labor cost will upgrade the regional industrial structure， while the reduction of transaction cost will induce the upgrading of regional industrial structure. On the ground of theoretical research， we conducted an empirical research based on the 2000-2011 data of 31 provinces and cities in China （except for Hong Kong, Macao and Taiwan）and built an empirical econometric model in order to test the labor cost with the average wage of employees， the transaction cost with marketization， financial convenience， and government efficiency， and the upgrading of industrial structure with the proportion of the third industry. The empirical study shows that the average wage of employees， marketization， financial convenience and the efficiency of the government have a significant positive effect on the upgrading of the industrial structure， which is consistent with the result of the theoretical research．