In mammals, skin begins as a single-layered epithelium, which, through a series of signals, either stratifies and differentiates to become epidermis or invaginates downward to make hair follicles (HFs). To achieve and maintain proper tissue architecture, keratinocytes must intricately balance growth and differentiation. Here, we uncover a critical and hitherto unappreciated role for Yes-associated protein (YAP), an evolutionarily conserved transcriptional coactivator with potent oncogenic potential. We show that YAP is highly expressed and nuclear in single-layered basal epidermal progenitors. Notably, nuclear YAP progressively declines with age and correlates with proliferative potential of epidermal progenitors. Shortly after initiation of HF morphogenesis, YAP translocates to the cytoplasm of differentiating cells. Through genetic analysis, we demonstrate a role for YAP in maintaining basal epidermal progenitors and regulating HF morphogenesis. YAP overexpression causes hair placodes to evaginate into epidermis rather than invaginate into dermis. YAP also expands basal epidermal progenitors, promotes proliferation, and inhibits terminal differentiation. In vitro gain-and-loss of function studies show that primary mouse keratinocytes (MKs) accelerate proliferation, suppress differentiation, and inhibit apoptosis when YAP is activated and reverse these features when YAP is inhibited. Finally, we identify Cyr61 as a target of YAP in MKs and demonstrate a requirement for TEA domain (TEAD) transcriptional factors to comediate YAP functions in MKs.