Epithelial development starts with stem cell commitment to ectoderm followed by differentiation to basal keratinocytes. The basal keratinocytes, first committed in embryogenesis, constitute the basal layer of the epidermis. They have robust proliferation and differentiation potential, giving rise to suprabasal cells, and are responsible for expansion, maintenance and regeneration of the epidermis. We generated basal epithelial cells in vitro through differentiation of mouse embryonic stem cells (mESCs). Early on in differentiation, the expression of stem cell markers, Oct4 and Nanog , decreased rapidly along with increased ectoderm marker keratin (Krt) 18 . Later on, Krt 18 expression was subdued when cells displayed basal keratinocyte characteristics, including regular polygonal shape, adherent and tight junctions and Krt 14 expression. Using Map3k1 mutant mESCs and environmental dioxin, we examined the gene and environment effects on differentiation. Neither Map3k1 mutation nor dioxin altered mESC differentiation to ectoderm and basal keratinocytes, but they, individually and in combination, potentiated Krt 1 expression and basal to spinous differentiation. Similar gene-environment effects were observed in vivo where dioxin exposure increased Krt 1 more substantially in the epithelium of Map3k1 +/− than wild type embryos. Thus, the in vitro model of epithelial differentiation can detect genetic and environmental effects on epidermal development.