Breaking labor market segmentation is recognized as a crucial aspect for building a unified national market and achieving high-quality development. An analysis of the impact of the digital economy on labor market segmentation was conducted using urban panel data from China. Firstly, the impact of the digital economy on labor market segmentation is found to exhibit an inverted U-shaped pattern, initially strengthening and subsequently weakening, which is confirmed to remain valid after endogeneity and robustness checks. Secondly, the influence of the digital economy on labor market segmentation is shown to vary by region, industrial structure, and economic foundation. The development of the digital economy in eastern and central regions, regions with a high proportion of the tertiary industry, and economically developed regions exerts a significant inverted U-shaped impact on labor market segmentation, while no significant impact is observed in western and northeastern regions, regions with a low proportion of the tertiary industry, and economically underdeveloped regions. Thirdly, human capital investment and industrial structure upgrading are identified as important mediating mechanisms through which the digital economy affects labor market segmentation. When the development level of the digital economy exceeds 0.270, labor market segmentation is weakened through the promotion of human capital investment. When the development level of the digital economy exceeds 0.337, labor market segmentation is weakened during industrial structure upgrading. Fourthly, the impact of the digital economy on labor market segmentation has a spatial spillover effect. The research conclusion provides empirical evidence for a profound understanding of the role of the digital economy in resolving the bottlenecks and obstacles of the national unified market and also offers important policy implications for accelerating the construction of a national unified market and achieving high-quality development.