Interleukin (IL)-38 is a member of the IL-1 cytokine family with reported anti-inflammatory activity. The highest constitutive IL-38 expression is detected in the skin, where it is mainly produced by differentiating keratinocytes. However, little data are available regarding its biological functions. In this study, we investigated the role of IL-38 in skin physiology. We demonstrate here that dermal fibroblasts and epithelial cells of skin appendages, such as eccrine sweat glands and sebaceous glands, also express IL-38. Next, using two- and three-dimensional cell cultures, we show that endogenous expression of IL-38 correlates with keratinocyte differentiation and its ectopic overexpression inhibits keratinocyte proliferation and enhances differentiation. Accordingly, immunohistochemical analysis revealed downregulation of IL-38 in skin pathologies characterized by keratinocyte hyperproliferation, such as psoriasis and basal or squamous cell carcinoma. Finally, intracellular IL-38 can shuttle between the nucleus and the cytoplasm and its overexpression modulates the activity of the transcription regulators YAP and ID1. Our results indicate that IL-38 can act independently from immune system activation and suggest that it may affect the epidermis directly by decreasing proliferation and promoting differentiation of keratinocytes. These data suggest an important role of keratinocyte-derived IL-38 in skin homeostasis and pathologies characterized by epidermal alterations.