The development of the lung epithelium is regulated in a stepwise fashion to generate numerous differentiated and stem cell lineages in the adult lung. How these different lineages are generated in a spatially and temporally restricted fashion remains poorly understood, although epigenetic regulation probably plays an important role. We show that the Polycomb repressive complex 2 component Ezh2 is highly expressed in early lung development but is gradually downregulated by late gestation. Deletion of Ezh2 in early lung endoderm progenitors leads to the ectopic and premature appearance of Trp63+ basal cells that extend the entire length of the airway. Loss of Ezh2 also leads to reduced secretory cell differentiation. In their place, morphologically similar cells develop that express a subset of basal cell genes, including keratin 5, but no longer express high levels of either Trp63 or of standard secretory cell markers. This suggests that Ezh2 regulates the phenotypic switch between basal cells and secretory cells. Together, these findings show that Ezh2 restricts the basal cell lineage during normal lung endoderm development to allow the proper patterning of epithelial lineages during lung formation.