Basal cells are multipotent airway progenitors that generate distinct epithelial cell phenotypes crucial for homeostasis and repair of the conducting airways. Little is known about how these progenitor cells expand and transition to differentiation to form the pseudostratified airway epithelium in the developing and adult lung. Here, we show by genetic and pharmacological approaches that endogenous activation of Notch3 signaling selectively controls the pool of undifferentiated progenitors of upper airways available for differentiation. This mechanism depends on the availability of Jag1 and Jag2, and is key to generating a population of parabasal cells that later activates Notch1 and Notch2 for secretory-multiciliated cell fate selection. Disruption of this mechanism resulted in aberrant expansion of basal cells and altered pseudostratification. Analysis of human lungs showing similar abnormalities and decreased NOTCH3 expression in subjects with chronic obstructive pulmonary disease suggests an involvement of NOTCH3-dependent events in the pathogenesis of this condition.