Based on the data collected from 12 major cotton producing provinces in China from 1999 to 2017, the impact of rising labor cost on total factor productivity of cotton has been examined and the intermediary effect of crop substitution has been verified. The results show that the rising labor cost urges the cotton producers to choose alternative crops, thus alleviating the inhibiting effect of labor cost increase on total factor productivity of cotton. The impact of it varies in different regions, and the suppressing effect of crop substitution is found only in the inland cotton areas. The cotton growers in northwestern inland area is restricted when adopting strategy of crop substitution. Further tests show that the target price policy of cotton reduces the motivation of cotton producers in Xinjiang to choose alternative crops, thus to guarantee the survival of the low-efficiency cotton farmers and block the path to increase total factor productivity of cotton through crop substitution.