Due to the large scale and complexity of civil infrastructures, structural health monitoring typically requires a substantial number of sensors, which consequently generate huge volumes of sensor data. Innovative sensor data compression techniques are highly desired to facilitate efficient data storage and remote retrieval of sensor data. This paper presents a vibration sensor data compression algorithm based on the Differential Pulse Code Modulation (DPCM) method and the consideration of effects of signal distortion due to lossy data compression on structural system identification. The DPCM system concerned consists of two primary components: linear predictor and quantizer. For the DPCM system considered in this study, the Least Square method is used to derive the linear predictor coefficients and Jayant quantizer is used for scalar quantization. A 5-DOF model structure is used as the prototype structure in numerical study. Numerical simulation was carried out to study the performance of the proposed DPCM-based data compression algorithm as well as its effect on the accuracy of structural identification including modal parameters and second order structural parameters such as stiffness and damping coefficients. It is found that the DPCM-based sensor data compression method is capable of reducing the raw sensor data size to a significant extent while having a minor effect on the modal parameters as well as second order structural parameters identified from reconstructed sensor data.