Lung and airway epithelial cells generated in vitro from human pluripotent stem cells (hPSCs) have applications in regenerative medicine, modeling of lung disease, drug screening and studies of human lung development. Here we describe a strategy for directed differentiation of hPSCs into developmental lung progenitors, and their subsequent differentiation into predominantly distal lung epithelial cells. The protocol entails four stages that recapitulate lung development, and it takes ∼50 d. First, definitive endoderm (DE) is induced in the presence of high concentrations of activin A. Subsequently, lung-biased anterior foregut endoderm (AFE) is specified by sequential inhibition of bone morphogenetic protein (BMP), transforming growth factor-β (TGF-β) and Wnt signaling. AFE is then ventralized by applying Wnt, BMP, fibroblast growth factor (FGF) and retinoic acid (RA) signaling to obtain lung and airway progenitors. Finally, these are further differentiated into more mature epithelial cells types using Wnt, FGF, cAMP and glucocorticoid agonism. This protocol is conducted in defined conditions, it does not involve genetic manipulation of the cells and it results in cultures in which the majority of the cells express markers of various lung and airway epithelial cells, with a predominance of cells identifiable as functional type II alveolar epithelial cells.