Innovation is the driving force for sustainable economic growth. The employment of enterprises is the cornerstone of maintaining social stability. Under the background of Chinese economic development and transformation, the paper distinguishes product innovation from process innovation, and uses a mathematical model to separate the mechanisms of both direct and indirect effects of innovation on employment growth in small and medium-sized manufacturing enterprises. By using the World Bank's survey data, which focus on the operating environment of small and medium-sized enterprises in China, this study empirically examines the impact of SMEs' technological innovation on their employment growth. The results indicate that technological innovation will not only affect the employment growth of SMEs through four direct ways——which are referred to as “price effect”and “productivity effect”of process innovation and “market effect”and “substitution effect”of product innovation, but also through an indirect route which are referred to as “advancement of employee skill structure”. The difference of our study from foreign studies is that, for small and medium-sized manufacturing companies in China, the “productivity effect ” of process innovation and the “substitution effect”of product innovation are the main ways to hinder their employment growth. At the same time, unlike domestic research, the “advancement of employee skill structure”is an important way for technological innovation to promote the growth of employment in Chinese SMEs. The paper further finds that the impact of technological innovation on employment growth in low-tech manufacturing companies is more sensitive. From the micro level, the results of this study confirm the influence of skill-biased technical progress on the employment in Chinese SMEs and provide a policy basis for alleviating the structural problems of“employment difficulties”and “recruitment difficulties”in China.